Banco Popular’s competitors may be gaining ground but the bank is still an attractive acquisition target. Chairman Angel Ron talks to Karina Robinson about strategies for SME and consumer finance business and why he is betting on staying independent.
Banco Popular Español is still one of the best banks in Spain, but its competitors have taken major steps in revenue generation and risk management, which means it no longer stands head and shoulders above the rest.
“Our average margin per client is 3.57% over assets, about 160 basis points over the sector average, which is less than it used to be but still better than them,” admits Angel Ron, chairman of Banco Popular.
Still, if it were not for the solid core of shareholders, including the Valls and Amorim families and German insurer Allianz, which control over 30% of the shares, this bank would have been gobbled up by competitors. It still presents an attractive target, especially as it has shown the ability to change strategies when necessary while maintaining its emphasis on profitability, solvency and efficiency. With a price-earnings ratio of 10.5 times on prospective 2006 earnings, it is not expensive.
Any acquirer, however, would have to hold on to the excellent management team, which is on the way to fulfilling its goal of €1bn in earnings in 2006, one million new consumers and 120,000 new small and medium-sized enterprises (SMEs) as clients.
“What distinguishes us?” muses Mr Ron on a warm spring day in Madrid. “The bank has an Iberian dimension, mainly focused on two principal clients: SMEs and individuals. From a philosophical point of view, we are a more Anglo-Saxon bank. You have to have the capacity to adapt and to be pragmatic without changing the nature of the bank.”
Property boom
Early in the decade, as interest rates fell, Popular focused almost exclusively on mortgages tied to the property boom. By the end of 2002, €80 of every €100 of new business was property related. During those years, its market share in mortgages grew from 6% to over 11%.
Property in Spain continues to boom. The construction industry accounts for 18% of GDP, which rose 2.7% in 2004. Opinion is divided over whether construction and property can continue this pace of growth, but banks are becoming slightly more cautious when dealing with that sector.
Popular’s strategic plan for 2003-2006 has focused on SMEs again, and consumer finance, as well as hardening the conditions for mortgages. The bank says it is capturing 400,000 new clients every year, of which about 50,000 are SMEs. (The bank defines SMEs – responsible for about 80% of Spain’s GDP – as retail).
About 90% of profits come from retail and the remaining 10% from large corporates, mainly ones that have grown with the bank.
Mr Ron says its strategy from 2006 onwards is one that will be discussed next year: “As long as we preserve our strong profitability strategy as a retail bank, the rest is a blank sheet.”
It already surprised the market once, when in 2003 it bought Banco Nacional de Crédito Inmobiliário (BNC) in Portugal, having eschewed until then the foreign adventures of local competitors like BBVA. Although BNC’s profits grew about 50% last year, its transformation into something more than a property-related loan business is slower than expected. This is due to Portugal’s recession-ridden economy, which has made management cautious about expanding the commercial side.
In 2004, BNC was responsible for €34m of Popular’s €801m in attributable profits. The medium-term goal is to increase this from over 4% of profits to 10%, which probably means another acquisition in Portugal.
Going for goals
Meanwhile, in Spain, Popular has been ensuring it makes the most of its SMEs. In 2003 it bought Iberagentes, a small asset management-cum-brokerage firm, and turned it into Popular Banca Privada, a joint venture with Belgian bank Dexia, which has a 40% stake.
“Popular’s first aim has already been accomplished,” says Mr Ron. “First, we are no longer losing clients. [Before the existence of the private bank] executives at the SMEs did not believe we had the capability of managing their private, non-company funds.”
Second, Popular says that the private bank already delivered profits in 2004. Iberagentes had about €1.4bn in assets when it was acquired; the new entity now has €2.2bn. The goal for 2005 is €3bn. Popular Banca Privada, which operates through 24 specialised branches all over Spain, has increased its client base by 43%.
Consumer finance grows
Consumer finance is a major emphasis for Popular, Spain’s fifth largest bank by assets and its most profitable in terms of profits on average capital. A growing economy and a large consumer society make this an obvious growth area. The bank had to make major investments in technology because the state of data mining in Spain lags behind that of major markets like the US. It created a technological platform from scratch for €10m and is starting to see results this year. It is developing three main lines: its revolving Visa card, intriguingly called HOP, already has 250,000 customers and a non-performing loan ratio of 3%. It is also doing financing at the point of sale, and, this April, started a telephone credit service.
Consumer finance accounts for 4% of total credits and is expected to increase sharply.
The bank’s €793m capital increase in March was another occasion on which the bank, which has an admirable 38.4% cost-income ratio, surprised the market. Some analysts speculated that under the new International Financial Reporting Standards (IFRS), Popular feared it would find itself with a capital shortfall.
“In no possible scenario did the new accounting rules mean we would need a capital increase!” says Mr Ron, forcefully. “In terms of results, IFRS will have very little impact overall. Depending on how much we grow this year, it will be a little bit negative or a little bit positive.”
The capital increase was needed on the back of a doubling of the loan book over four years. Although profits rose strongly, they did not double, while new businesses were consuming more capital than traditional ones. The bank has also been opening new branches. In 2004, it opened 51 branches, giving it a network of 2330.
Forecasts and bets
What does the future hold for this banking jewel? Its current return on equity of almost 26% looks set to fall over the next years, albeit rather gently. Lehman Brothers, for instance, forecasts it will fall to 24.2% in 2006 and 22.7% in 2007, still admirable but not quite top of the pile in Spain anymore.
“We are betting on maintaining our independence. The team has proven it can deliver profit growth and market share. With over 30% of the bank’s capital in the hands of a hard core of shareholders, we can work in tranquillity,” says Mr Ron.
If a round of cross-border consolidation starts in Europe, The Banker would not bet on it. But the management will need to be kept on board and the culture would need to remain unchanged – a challenge for any acquirer.
