2018-03-07 12:53:43
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.