Santander: The masters of retail banking

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By:
Clive Horwood
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Santander is one of the most remarkable stories in modern banking. Even the group's highly-ambitious chairman, Emilio Botín, is amazed at how the bank has grown from a small Spanish domestic bank to a place in the global top 10 in just 20 years. He reveals the strategy that has made Santander what it is today.

Botín: the man and his mission | Getting back to the Abbey habit | Awards for excellence - Best bank

EMILIO BOTÍN CALLS him the dealmaker. So when Juan Rodríguez Inciarte flew into London in the summer of 2004, it was with a specific – if surprising – purpose in mind.

Inciarte spent three days visiting branches of troubled UK retail bank Abbey. He took with him an expert in UK retail banking.

Inciarte, the CEO of Santander Consumer, turned up unannounced and pretended to be a customer, attempting to find out more about the bank's products. He wanted to know everything about Abbey's business – branch location, the quality of customer services, the scope of products.

After Inciarte flew back to Spain to meet his chairman, a decision was quickly made. Abbey had been identified as a chance to break into Europe's largest and most profitable banking market. Santander's expertise in retail banking would quickly halt, and then reverse, Abbey's slide in profitability.

Inciarte arranged to meet Luqman Arnold, the former UBS banker who in October 2002 had been appointed CEO of Abbey to sort out the mess on its balance sheet caused by the collapse of Abbey National Treasury Services.

Did Arnold know what was coming? He did not have to wait long to find out. Inciarte headed straight into questions about the business, such as the average number of customers per branch and the average number of products taken up by each customer. Arnold was a brilliant investment banker but had little experience of the retail market. These were not the sorts of numbers he had immediately to hand. Inciarte jumped in for the kill. "This is the reason why we should run Abbey," he is alleged to have told Arnold. A few days later, a deal was agreed. The Abbey board announced its recommendation of an all-share offer from Santander valuing Abbey at £8.5 billion ($15.5 billion).

Despite a concerted attempt by Abbey's rival HBOS to scupper the bid, the ground-breaking takeover was completed just 108 days after the initial offer.

The Abbey deal completed a remarkable two decades for the Santander group, during which it had grown from being the world's 152nd largest bank by market capitalization to the ninth largest, and the seventh largest by assets. It is widely regarded as one of the best – if not the best – retail banking groups. It operates in more than 20 countries, with growing businesses in Latin America and central Europe. And its successful takeover of Abbey, the largest cross-border bank merger in Europe to date, looks set to inspire a wave of consolidation throughout the continent's retail banking industry.

Stuff of dreams

"Twenty years ago I would never have dreamt that we would be the ninth-largest bank in the world, with projected earnings of over €5 billion," Botín, the chairman of Santander, tells Euromoney. "In the mid 1980s our profits were just €200 million."

But he says that the basic model has not changed throughout those 20 years. "We are always conservative and risk averse," he says. "Banks fail because they make bad loans. We are much more conservative than the industry in general."

Although now in his eighth decade, Botín still exudes enormous energy, with that hint of mischief that marks out the truly successful. His tie is red, the same hue as Santander's corporate colour. So are the ties of all his colleagues around the table. For someone who takes branding so seriously, Santander's corporate logo – a flame – is somehow appropriate. The fire still burns strongly within Botín, despite almost 50 years at the bank.

When Botín took over the reins of Santander from his father in 1986 at the age of 52, the bank was only the sixth largest in Spain. "We knew there had to be consolidation in Spanish banking, and that to survive and prosper Santander had to be one of the three largest banks in the country," he says.

Botín has become one of the greatest consolidators in the history of modern banking. Ask him the total number of acquisitions he has made in the past 20 years and he is unsure of the exact figure – it is at least 49. But he has no doubt which of them was the most important.

"We are very proud of Abbey, which represents one-third of the Santander group today. The takeover of Central Hispano was also crucial. But without a doubt the most important development in our recent history was buying Banesto. It changed the fabric of the bank. We knew if we wanted to be an international player, we needed to be the number one bank in our home market. Banesto made that possible. It was a quantum leap for Santander."

Tales of the purchase of Banesto are now the stuff of legend. The bank had run into trouble under the stewardship of its previous CEO, Mario Conde. It had been rescued by the Bank of Spain, which put it up for auction in 1994. At a board meeting, the price Santander should pay was discussed. After several hours, Botín called an end to the meeting and, away from prying eyes, wrote down the figure he thought would secure Banesto before sealing the envelope. Botín's bid won, but he and the board were worried he might have overpaid. They don't believe that now. "When we submitted the bid for Banesto we knew we could not afford to lose the opportunity. So we bid high. But what was €100 to €200 million in relation to the long-term success of the business?" Botín says.

The success wrought from the Banesto acquisition drives Botín's strategy to this day. "Banesto taught us that when a unique opportunity arises you have to take it. That was the case with Abbey. It was the only opportunity to get into the UK banking market. Now everyone is looking to go cross-border, but we have at least a 12-month head start."

Alliances

Botín has made a habit of forming alliances with other, largely domestic, banking groups in Europe. At various times, Santander has had strategic investments in Société Générale, Commerzbank and First Fidelity. Today, it owns 8.6% of San Paolo IMI in Italy and has three seats on the board. San Paolo has a reciprocal 2.2% stake in Santander, but no board representation. But it's more than a question of financial support. "We've invested in alliances financially, but it is something else to develop a special relationship between two banking groups," he says.

None has been more important than Santander's relationship with Royal Bank of Scotland. It began in the late 1980s. Each bank took a stake in the other, and two seats on the board. Botín and Inciarte joined RBS's board, and RBS's then chairman, Lord Younger, and chief executive, George Mathewson, sat in Santander's boardroom.

What brought them together? "We were both small banks from the north of our country with ambitions to become larger, more successful banks," says Inciarte. "All our discussions were about how to grow income. Emilio challenged George, Fred [Goodwin, now CEO of RBS] challenged me. There was no holding back; we told each other the truth."

Botín adds: "You cannot overestimate the importance of this relationship. Each time we met, we challenged each other, shared ideas and offered our support. We learnt a lot from each other. And we were there to support each other when help was needed. Analysts cannot understand the importance of such relationships."

This involved providing crucial support in the boardroom and in public, when each bank was looking to make acquisitions. Botín says that Younger offered immediate support when Santander was looking to buy Banesto, and continued to support Santander's management when other shareholders complained that the bank was offering too much for a troubled financial institution. Botín was only too happy to reciprocate when in 1999 RBS was looking to make its own ultimately successful business-changing acquisition of UK rival NatWest.

That relationship had to come to an end when Santander made its move for Abbey, and the cross-shareholdings have been wound down (although RBS still owns 2.8% of Santander) and reciprocal board seats withdrawn. Botín says the strong personal relationships endure, but admits that the forced ending of the business relationship is tinged with sadness. But right to the end the support was there. When the European Commission threatened to delay the Abbey acquisition, RBS made representations in support of Santander, even though it was about to become a direct competitor.

In any event, Botín says that his stake in RBS was one of the best investment decisions he has ever made. "We earned 23% return on income on an annualized basis from our stake in RBS over the past 17 years," he says. That is a total return to shareholders of about €4.5 billion.

And sitting on the board of RBS for 17 years gave Santander something that was priceless – a unique insight into the UK retail banking market, which meant its management could hit the ground running when the Abbey takeover was complete.

Remaining ambitions

The US is an important part of the puzzle for Santander. To be a truly global player, a bank surely needs a presence in North America. RBS has invested heavily in the US with its acquisitions of Charter One and Citizens Bank. Santander has an alliance of sorts with Bank of America through the US bank's investment in Santander's Mexican bank, Serfín.

For now, that will suffice. "At this moment our focus is not on mergers or acquisitions but on growing the businesses we already have. We won't automatically discard an opportunity if it presents itself, but prices for banks in the US are high and that market is not a priority or a goal," says Botín. "We want to make Abbey the best retail bank in the UK. There is a lot of room for organic growth in countries such as Portugal, Mexico, Brazil and Chile."

Santander is unique among the world's 10 largest banks in deriving the vast majority – 82% – of its revenues from retail banking. The stated aim is to have a share of at least 10% in all core markets. It has now achieved that with Santander Totta in Portugal, which is generating profits of about €250 million a year.

In Latin America, Santander's Brazilian bank, Banespa, contributes about half of its business revenues in the region. "We have invested $5 billion in Banespa. It was a big price but it was worth it." Latin America generated about €1 billion of total profits of €3 billion in 2004.

Santander has suffered its setbacks in Latin America – notably the losses incurred by online bank Grupo Patagon in Argentina; Santander was forced to write off its total investment of €628 million in 2002. But it is one of a very few firms to make money consistently from the region. "We've been very careful about taking risks, but the most important thing is that we have a local approach to each business," says Botín. "Our aim is to have the best team in each country. Each bank is run by a local expert. We provide the back-up, the culture, the risk officer and the accountants."

Latin America is part of the history of Santander, something its management is very proud of. "The root of Santander was to finance trade between Latin America and Spain. We had branches in Latin America even before we had one in Madrid," says Inciarte.

And Santander is rapidly growing its consumer finance business, in both western and central Europe. It has quickly become the third-largest consumer finance business in Europe.

The Microsoft of banking

Retail is in the detail. It's a commonly used phrase when it comes to describing the key to success in retail banking. From the very top of the institution down, Santander demonstrates an attention to detail that is second to none. Most of the senior managers are lawyers, economists or engineers by training – so there's a very science-based, logical approach to running the business. The changes Santander has instituted in a short space of time at Abbey show how its management see the minutiae of the business as being every bit as important as the bigger, strategic picture.

But attention to detail is not the only competitive advantage that Santander believes it has over its retail banking rivals in Europe. The group has developed a technology platform that it says allows all of its European retail networks to be more flexible, more proactive and more cost efficient than any other bank – so much so, in fact, that its senior managers like to think of Santander as the Microsoft of retail banking.

Such a system cannot be developed overnight. Global chief information officer José María Fuster first joined Santander in 1988, with a view to implementing a state-of-the art system for what was then a relatively small banking operation.

But the platform that now drives Santander's business throughout Europe – called Parthenon – was a happy accident. Its first incarnation was thought up by bankers at Banesto. When Santander bought Banesto, Fuster realized the opportunity. "Banesto had started something which had real potential. The senior management of Santander recognized Parthenon's potential and invested heavily in it."

To date, the total investment in Parthenon stands at about €500 million. But the savings for Santander are estimated at about €265 million a year. The system should be fully operational within the Abbey network, as well as for Santander Totta in Portugal, in 2007.

Abbey's CEO, Francisco Gómez-Roldan, says that Parthenon should save the UK bank £100 million annually after three years, and more in subsequent years. The cost of bringing the Parthenon software into Abbey and then implementing the new system across the bank is budgeted at around £240 million.

The first challenge in creating a retail bank technology platform is to integrate accounting with management information systems, and then reconciling each of these with a data warehouse of every customer's activity with the bank across each product silo, from personal accounts to debit and credit cards.

More recently, new channels have been added to the equation through the growth of non-branch customer activity, such as internet banking. Each new channel or silo creates its own operational risk and, hence, operating cost.

The strategic issue for bank management is, therefore, finding a way to integrate customer and channel management. Santander's solution was to redesign all of its applications to a new customer-oriented architecture, where the customer database is at the heart of the system. Alongside this, a product catalogue identifies all of the bank's products in one place, making cross-selling much easier. In addition, all of this information is reconciled into a catalogue of all banking operations and a continuous settlement model. The general directory of operations took more than 10 years to develop. To give an indication of the undertaking, Parthenon has 111 applications and more than 6,000 banking operations.

This creates coherence and quality of information, allows risk management to become much more efficient and means that accounting is no longer at the heart of the system. Importantly, the system is multilingual, allowing information to be shared across Santander's banking operations.

Another advantage of Parthenon is that it allows the disparate parts of the Santander group to share in each other's product expertise. "If Abbey, for example, wants to launch a new product it can see if it is in the products catalogue shared with SCH, Banesto and Totta," says Fuster. "That saves a lot of time and investment."

The main technical partner to Parthenon is IBM, but Fuster says the key is the software, which has been developed in association with Spanish-based firm Isban. "Most people look at banking systems and say 'It's technology, we can just buy it in'," says Fuster. But Santander has created a unique code with Isban that its competitors will not be able to buy.

Fuster believes most UK banks are relatively inefficient and exposed to operational risks as they still adopt a silo approach to banking technology, although they are in the process of integrating branches with off-site business channels such as ATMs and telephone and internet banking.

Gómez-Roldan says that one of the key advantages of Parthenon is that the cost base hardly rises as business activity grows. "In effect Parthenon gives you a flat back office," he says.

The negative view

Not everyone shares this rosy view of Santander. Botín has made quite a few enemies during his career. He has been ruthless in ridding the bank of people who do not share his vision or whom he perceives as a threat. The most famous example of this was the ousting, in 2002, of Angel Corcóstegui, who had become CEO and vice-chairman of Santander Central Hispano following the merger of the two banking groups, after internal disputes about the composition of the bank's board. At the time of the consolidation in 1999, Santander and Banco Central Hispano had been described as a "merger of equals". But the board remained heavily slanted in Botín's favour.

This allowed Botín to bring back his daughter, Ana Patricia, who had been forced to leave the bank in 1999 following press reports of a power struggle between her and Corcóstegui.

This perceived nepotism is seen as anomalous in one of the world's top banks, especially as the Botín family owns less than 3% of group stock.

It is an accusation that Botín and his colleagues rail against. But it has caused problems, notably when a campaign against Santander's takeover of Abbey, allegedly orchestrated by rival bidder HBOS, centred on issues of corporate governance. Santander's corporate literature now makes a big play about its dedication to transparency and openness to investors.

A high profile – and Botín is known variously as the Don of Spanish banking and the Pharaoh in his own country – makes you a target. And Botín has also been the target of disgruntled Spanish shareholders and inquisitive magistrates in a high-profile court case.

An investigating magistrate, Teresa Palacios, has ordered that the case, known as "Loan Assignments", proceed to trial, which will probably happen sometime next year.

Santander denies any wrongdoing. The public prosecutor has recommended that the charges be dismissed. The finance ministry – allegedly the damaged party – says it is satisfied that the matter has been resolved.

Under Spanish law, an investigating magistrate can order a case to trial over the objections of the public prosecutor.

The charges have been brought by a group of small shareholders who have launched at least 30 lawsuits against Santander in recent years, none of which has prospered. The group is led by Rafael Pérez Escolar, a former director of Banesto who was convicted of bank fraud and misappropriation of funds in the trial that followed the collapse of Banesto and its acquisition by Santander.

Pérez Escolar was one of the two accusers in a case that resulted in an acquittal in February [see Ghosts from the past still haunt Botín, Euromoney October 2004].

The same investigating magistrate, Palacios, had ordered that Botín and two former executives stand trial earlier this year in a case involving payments made to the two executives when they left. The three-judge high court panel, which doesn't include the investigating magistrate, cleared the three of any wrongdoing.

The "Loan Assignments" case refers to a tax shelter marketed by Spanish banks to individuals in the late 1980s, which was closed down by a government decree in 1989. The charge is that Santander did not accurately disclose to tax authorities all information on the customers who had used the tax shelter, including some who did so by falsifying documents. The number of instances in which this allegedly happened has reduced from 47,000 to 28 as the case has dragged on for nearly 14 years.

The next challenges for Santander

But these are sideshows. The future of Santander involves three major issues.

Abbey is the real test of whether the Santander model can work in any retail market. UK retail banking is highly competitive, with six major firms all wanting to be the number one player.

The second is the succession issue. Botín says he is going nowhere. In his heart he would surely like his daughter, who now runs Banesto, to take over the firm. But will his increasingly diverse group of institutional investors, many of them US and UK institutions new to Santander since the Abbey takeover, allow it? Botín is at least aware that he needs to raise the profile of trusted and skilled lieutenants such as Santander's CEO Alfredo Saenz, Inciarte and Gómez-Roldan.

And the third is what happens next. Although Botín claims to be focusing his attention on organic growth, he is a dealmaker. If an opportunity arises, he will surely take it. Santander's management keep their cards close to their chests. They like to execute deals quickly and without attracting attention. Italy is an obvious candidate for expansion. And would Botín be prepared to chance his arm in the notoriously unprofitable retail banking market in Germany?

One thing is for sure – if there is a takeover, you won't know about it until the deal is agreed. Unless you spot Juan Inciarte in your local branch.

Botín: the man and his mission | Getting back to the Abbey habit | Awards for excellence - Best bank