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Europe s banking champion took a unique approach to globalisation. Has it been
vindicated?
TAKING a business onto the global stage is hard. Doing it with banks can be
suicidal owing to their complexity and leverage. For over 100 years an
assortment of adventurers and visionaries have almost always tried one of two
approaches. Either they spread firms thinly over scores of countries and focus
on servicing big companies and facilitating trade. This is the way of Citigroup
and HSBC, and the path that China s big lenders are racing down. Or they focus
on investment banking from hubs; think of JPMorgan Chase or Deutsche Bank in
New York, Hong Kong and London. Both blueprints have often resulted in buckets
of tears.
In the 1990s a third way emerged from provincial Spain; creating a global
retail bank with a deep presence in many countries, allowing true economies of
scale. The pioneer was Santander, a middle-weight bank from the Bay of Biscay.
Today it is the king of the euro zone: the bloc s largest lender by market
value, with 133m clients, mainly in Brazil, Britain, Mexico and Spain. Its
lofty position in Europe s league table demonstrates that its approach has, on
balance, worked.
Santander is run by Ana Bot n, an optimistic character who took over from her
father, Emilio, on his death in 2014 (the Bot n family no longer has a
significant stake in the bank but its reputation helped her win the top job).
He had used guile and charm to expand by means of acquisitions worth $80bn in
total, first in Spain, then across Latin America and in Britain, where it
bought Abbey in 2004. As the financial crisis struck in 2007 Santander seemed
well-positioned to weather it. It did not run a big investment bank and had
just made an opportunistic acquisition of ABN AMRO s arm in Brazil, giving it
heft there for the first time.
But the past decade has turned into the banking equivalent for Santander of the
Japanese game show Endurance , in which contestants face an incredible
sequence of tortures. Spain s property crisis created a mountain of bad loans
which peaked only in 2014. Brazil s economy shrank in 2015 and 2016, and,
although it has stabilised, the country faces a rumbling political crisis. In
2016 Britain voted for Brexit and its currency plunged. Now Mexico faces an
uncertain future with the renegotiation of NAFTA. In total these four economies
account for 79% of Santander s profits.
The pessimistic way of thinking about this is to look at the bill. Since 2008
Santander has recorded a cumulative $139bn of bad-debt charges, more than any
bank except Citi and Bank of America (which were bailed out) and double the sum
at ICBC, the biggest bank in China, the economy with the most dud loans. On top
of that, slumping currencies have wiped out a fifth of profits.
A more charitable view is that despite all this Santander never made a
quarterly loss. Because it mainly lends to individuals and small firms, often
in countries with high real interest rates, it charges borrowers more. Its loan
book has yielded an average 8% in the past decade, compared with 6% for 15 big
global peers. It is run efficiently and has not faced huge fines or sudden
trading losses. As a result its cumulative operating profits (before the
bad-debt charges) were $261bn over the past decade: another staggering sum,
higher than those of any bank other than JPMorgan Chase and Wells Fargo,
America s two mightiest. Gigantic operating profits have allowed the bank to
absorb massive losses.
Survival is a low bar, though. Has Santander rewarded its shareholders? Its
shares have outperformed the European industry, but so what? Its return on
equity (ROE) is a soggy 7%, reflecting $32bn of goodwill from all the
acquisitions. It is hardly a superb performance. Still, the bank s shares trade
in line with its book value, suggesting returns will improve. And in a parallel
universe, had Santander stayed at home in Spain, it would have done far worse
given that its profits there sank by 77% from peak to trough.
For Ms Bot n, this is mostly water under the bridge. What matters now is
demonstrating it still makes sense to run a geographical conglomerate. Here the
signs are better. Excluding goodwill, return on tangible equity (ROTE) is
already a passable 10%. And Santander does seem to outperform its local peers.
Schumpeter has constructed a synthetic twin of the bank, based on the
combined performance of the local banks in its markets, weighted by Santander s
geographic mix. Its ROTE is an inferior 8.5%.
Since taking charge Ms Bot n has built up capital, brought bad debts under
control in Brazil and done several midsized deals to boost the bank s position
in various markets in June it bought Popular, a troubled midsized Iberian
lender. But her big idea has been to focus more on organic growth. Only 13% of
the bank s customers use it as their main bank; by lifting this figure
Santander would earn more fees. In Brazil and Mexico roughly 60% of the
population still do not have bank accounts, an opportunity.
Technology is key on both fronts. In Spain Santander is ramping up a digital
sister bank called Openbank, with mobile products and its back-office in the
cloud. In Brazil and Mexico it has launched Superdigital, a mobile-payments
service for the unbanked. This drive to create a large, loyal, cross-border
digital customer base mirrors what big emerging-market fintech companies, such
as Ant Financial in Asia, are doing. The prize is higher market share and lower
costs. If technology can be used to improve underwriting, it could lower bad
debts, too.
133m reasons to do better
It is unlikely that another global mega-bank will be built using Santander s
third way . Most countries have got nervous about foreigners buying their big
lenders. Yet Santander s unique legacy means it remains one of banking s most
interesting experiments. It straddles the rich world and the emerging world,
where many digital innovations happen. It has no big investment bank to
distract it. And it has the most customers of any bank outside China and India
(Citi is next, with 110m). Could Santander become the first global bank to earn
a high ROE because it actually has better products? The industry has been
waiting for over 100 years.