Anyone looking at the homepage of Banco Santander’s websites in Spain and Mexico could be forgiven for thinking that the digitalization of banking in emerging and developing markets is homogenizing banking models. They might even question the notion of distinct emerging market banking as still ‘a thing’.
According to Carlos Rey, Santander’s regional head of South America, this would be a mistake. Consumer and corporate banking in emerging markets is still a very different proposition to that in developed markets.
“The businesses are very different in the sense of volumes, of growth and interest rates,” he says, adding that it is by far the macroeconomic differences that create challenges. Penetration of banking and credit is lower in emerging markets and, while this brings opportunity, the risks and the strategies to grow new segments and blend portfolios for optimal risk-adjusted return are complex.
Rey argues that the bank’s success in the emerging markets of Latin America – Santander has the largest banking franchise in the region – has been the product of its ability to operate locally with the depth of a domestic bank, while optimizing the advantages of its global network.
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He argues that in practice this is a balancing act that isn’t easy to achieve.
“Typically, banks struggle when they try to incorporate global efficiencies, and they lose their local grip – when they start moving the axis of operations towards the global, they lose the local grip. And then they leave, which is the Anglo-Saxon story,” says Rey.
His words resonate in a region where Citi is extricating itself from Mexican retail banking, its largest remaining consumer-banking market. HSBC, too, has retraced its universal banking ambitions throughout the emerging markets. By contrast, emerging markets are driving Santander – the weight of contributed profits from its emerging markets businesses is growing.
In 2022, the bank’s Latin American business grew profits from these emerging markets by 10.3%, with a growth of 9% in customers and a return on equity of 18.8%.
“We are the best at combining very deep local capability and extracting global value from the group,” says Rey. “Even though our businesses in Latin America don’t operate the same way as our banking in the US or Europe, we are still able to extract value from global assets in the sense of technology, processes and functions.
“This is vital, because to be relevant in retail you need to have scale, you need to have market share, but you also need to have a super-industrialized model that enables the cost-to-serve to be very low. The populations we serve in Brazil mean that the margins can be very narrow – so the response to this is to be extremely proficient in risk management and to have an extremely low cost-to-serve. That comes from industrialization, which typically comes from digitization.”
The efficiency of Santander’s South American operations – with an average ratio of 37% – highlights the balance between local and global operations that the bank has managed to achieve.
However, integrating global technological tools isn’t cost free. Santander has invested over €2 billion in capex in the region and will add another €700 million this year to ensure it remains at the cutting edge of digitalization – both client-facing and internally.
“We [in South America] are in a good moment of the cycle, and I expect a very positive year in terms of efficiency and profitability,” says Rey. “It might depend a bit on interest-rate sensitivity – and that’s still a little bit of an open question at the moment – but even this year we had record results in six out of our seven markets – and that was with negative sensitivity.”
We are the best at combining very deep local capability and extracting global value from the group
Carlos Rey
Not only does he think that Latin America will bring stronger growth that will help drive Santander’s developed-market exposures elsewhere, but he thinks that the region will outperform other emerging markets in the coming years.
“I think the region is going to be in fashion for two reasons: one, we’ll have growth again; and two, politically, we are going to enjoy relative stability, so I think the economies will get better and better. We bet on that – we’ve been investing in the region and we will continue to do so. And given we are the leaders in the region, we will also have growth.”
Rey says the bank is looking at acquisitions as well as organic growth and, while there are unlikely to be any “jumbo deals” given the bank’s already large scale, he says there is potential for tactical deals that add presence and capabilities in segments.
Another difference between emerging-market and developed-market banking is that in the former, public banks are still competitors. Rey needs to plot a course for Santander that anticipates the challenges of both public- and private-sector competitors. For example, in Brazil, Rey expects a more proactive Banco do Brasil, while in Uruguay and Chile the state-controlled banks have large market shares and an in-built advantage in terms of cheap funding costs.
However, he sees as much opportunity as threat from such competitive market dynamics.
“Sometimes it’s tough to compete because their incentives are different – it’s not always simply about profitability – there are other dynamics,” he says. “But if we maintain our focus on service quality, I think we have a chance to build market share here as well.”
