Do you expect there to be further consolidation in the world banking industry?
Botin: I think the move towards banking consolidation will probably continue in some countries. But you can’t generalize. For example, I don’t see consolidation in Europe on the scale seen in the United States recently. Even with the euro, language, cultural and other differences will persist in Europe and put constraints on the scope for cross-border mergers. Another factor is the existence of fairly rigid labour laws that make mergers less cost efficient than in other parts of the world.
Do you see banking consolidation putting any downward pressure on professional salaries?
Botin: It’s clear that consolidation in the financial sector tends to put a brake on the salary spiral in some areas, which in my opinion has been excessive and probably unsustainable over the past few years.
What is a bank?
Botin: Banks are changing very fast as a result of technology and the process of disintermediation. The challenge is to stay ahead of the game with the conviction that there will always be a role for banks based on their capacity for assuming risk and generating value for clients. In this respect, there are no fundamental differences between traditional risk intermediation, risk underwriting or placing paper in the market. I firmly believe that those that reject change will get left behind in a world that leaves few opportunities to correct mistakes.
How important is it for your bank to expand in non-banking areas such as insurance and asset management?
Botin: On expansion in areas such as asset management and insurance I have no doubt that the migration of traditional deposits to other savings instruments and insurance products is unstoppable. Santander, market leader in Spain in asset management, recognised this a long time ago and this business is a priority for us in our Latin American expansion.
What or where is your bank’s biggest risk?
Botin: If, as I mentioned earlier, capacity for risk-taking is one of the main features of a bank, at Santander we believe it is vital to develop the most advanced methods possible for estimating and analysing the risks that arise from the inevitably changing ways of doing business. These changes affect not only treasury and capital market operations, where value at risk (VAR) analysis has for many years been the norm at Santander, but also traditional lending which we subject to Rorac (return on risk adjusted capital) analysis covering the simplest of personal loans to operations for large multinationals.
What is the most important qualification or quality needed to be a bank CEO? Do you see this changing in future?
Botin: From my standpoint a bank CEO must never lose sight of the traditional principles of banking business (such as a strong capital base, and effective risk management), and at the same time have a vision of the future and great ability to adapt to changes in the marketplace. He therefore needs a mix of qualities that are difficult to find in one person, but which will be essential in the future.
What do you worry about?
Botin: What most concerns me is in treasury and capital market risk. It’s something that can easily get out of control. I therefore consider the internal audit department to be of decisive importance because its mission, amongst other things, is to avoid nasty surprises.
How important will proprietary trading be to your bank going forward?
Botin: Proprietary trading has produced consistently strong results for Santander over the past few years. I expect this trend to continue, but as our commercial banking activities have increased markedly as a result of acquisitions in Latin America these profits will in relative terms mean a smaller proportion of total income in the future.
How important is it for a bank CEO to have an intimate understanding of derivatives and risk management?
Botin: Derivatives and risk management are two areas that no bank CEO can afford to ignore, following the repeated warnings from regulators and the banking community itself. Santander’s executive committee has dedicated a lot of time to ensuring that the Chairman and the Board understand these products and the risks they entail.
How would you like to see the regulation and supervision of banks improved?
Botin: Though some might feel bank regulation and supervision is sufficiently stringent already, I believe it is vital to do whatever possible to strengthen it. Santander does business in many countries and I am most at my ease in those countries where there is strong supervision.
How will the introduction of the European single currency affect your bank?
Botin: Santander has been preparing for the changes expected from the euro for a long time. Our strategic alliance with Royal Bank of Scotland, amongst other objectives, sought precisely to help prepare our bank for the changes. Aside from this, the likely impact on our businesses from the euro is being exhaustively examined. If I had to draw any conclusion from all this, it would be that we see the euro more as an opportunity than a risk and for this reason I am most optimistic on the implications for the Spanish economy and for Grupo Santander in particular.
Why have banks been much more profitable in the 1990s than they were in the 1980s? Will this continue?
Botin: Banks have become much more competitive in the past few years, as a result of a much more efficient use of capital, new risk management tools, new technology that cuts operating costs and also alternative distribution channels. To the extent that these resources have yet to be fully exploited, I believe there is still potential for banks to maintain strong profitability, even in a more competitive environment.
Any generalization on profitability should be taken with a pinch of salt: not all markets are the same, nor are all banks, and each case has to be weighed on its own merits. The future will depend on the ability of each bank to find its place in a fast-changing environment.
How will technological developments change the shape of commercial and retail banking?
Botin: Technology has substantially changed the way we do banking: client attention and cost savings now depend fundamentally on technology. Very probably, in the next few years, the market will make an important leap forward in this area: phenomena such as the growth of the Internet and the appearance of new financial intermediaries will mean new challenges that should not be underestimated.
