Class of 2019: Santander

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Spain’s biggest bank is moving further away from its deal-making past, instead seeing a way forward for its troubled US and UK banks in payments and cloud technology.

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Tech brings answer to Anglo-Saxon woes

After the year in which Andrea Orcel did not become chief executive and when Latin America went from strength to strength, Santander’s two biggest problems remain. 

The first is what to do about its poor returns in the UK. The second is the future of its long-troubled US operation, as greater regulatory freedom should allow it to take a different strategic tack in the world’s biggest economy.

The late executive chairman Emilio Botín would have answered these problems with a big bank purchase or a rapid sale – often with external advice from investment banker Orcel, who Santander named but then unnamed as chief executive. But nowadays in Europe, including Brexit Britain, buyers of big banks are scarce – and for good reason.

Ana Botín, who took over in 2014, followed an Emilio-style approach in her ambition to bulk up in the small and medium-sized enterprise sector in 2017, snapping up Banco Popular for €1 when it was on the brink of failing. 

In the UK, however, she and her bank have not been so bold. Mortgages equal about three quarters of Santander UK’s balance sheet, thanks to purchases of former building societies in the previous decade. 

Santander chose not to help Royal Bank of Scotland meet its EU-mandated efforts to lower its SME market share, even when RBS paid other banks to do so. It is consequently heavily exposed to a mortgage price war.

Meanwhile, in the US, Santander has not been able to make any strategic changes for years – no new products, nor even new branches, let alone acquisitions – due to regulatory restrictions springing from that subsidiary’s weak financial management and corporate governance. As a result, its franchise there is as disjointed and sub-scale as ever.

As 2019 drew to a close, those US restrictions were all but lifted. As in the UK, however, there is little chance of a return to big bank purchases. There is a sense that its old rule of building big market shares (at least 10%) in a few markets is less important if the bank can easily transport a new global digital platform built on cloud technology. 

That does not mean that scale no longer matters, just less on a national level. Rather than buying a legacy bank and system in the US or UK, Santander prefers to invest more in international consumer finance and payments platforms – including merchant acquiring and foreign exchange – largely because of the scope to gain greater global economies of scale in those businesses.

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Ana Botín

“We think we can do payments better than others, and we will offer that service to other banks that don’t have our scale,” Ana told Euromoney last year, after describing a shift away from domestic vertical integration in the bank’s new strategic plan in April. 

Overall, a new cross-border operational approach could widen the bank’s opportunities, even in areas where it does not have a big market share, like Germany, Colombia, the US outside the northeast and UK business banking.

“In the IT world, we are going from having an IT centre per bank, to a journey of having global platforms developed in the cloud, which will eventually serve all banks,” chief executive José Antonio Álvarez told Euromoney in 2019.

In this new setup, Santander may still target SMEs – but increasingly it will be through digital channels and fintech tie-ups – and clients that appreciate its international reach more than a nearby branch. 

In the US, after the lifting of its restrictions, it could widen a deposit base that is today very regional. This may have more value thanks to positive Federal Reserve rates. It will also bolster the US contribution to group profitability by reducing reliance on wholesale funding resulting from its US auto-lending subsidiary. 

Again, a digital method is a more likely route to expansion than the big acquisition of a regional bank.

Compared with Europe, the US has relatively few digital-only banks, thanks to the Fed’s reluctance to hand out licences. But the US could be a destination for Santander’s Madrid-based online lender Openbank – or at least its cloud-based IT system. 

After relaunching in Spain two years ago, Openbank launched in Germany in 2019, where the group also has a funding mismatch thanks to a large consumer finance business.

Santander also wants to do more to serve US corporates. But, again, it expects clients will judge it more on its strength in countries such as Mexico and less on its thin or non-existent network in most US cities.

The story is similar in the UK. Ultimately, financial institutions bankers still see Santander as a potential buyer of a challenger bank, such as Clydesdale. Yet in the shorter term, Santander hopes fintech will offer alternative methods of diversifying away from mortgages. It recently agreed a UK loan partnership with eBay, for example.

In Spain, after the Popular acquisition, the digital strategy allows it to embark on more cuts to its branch network – especially now interest rates are even lower and the regulatory environment no easier.