Spanish banks are reporting record profits on the back of continued growth in mortgages, consumer credit and, for Grupo BBVA and Grupo Santander, their Latin American operations.
Some of the old chestnuts are still there: the banks are still losing market share to the cajas (savings banks), Santander is still trying to improve its customer service while rumoured to be looking at another UK acquisition, while BBVA is still looking for a non-Latin American acquisition to lower its dependence on the region (44% of 2005 net attributable profit compared with 32% for Santander, according to Standard & Poor’s).
And Spanish banks are still among the most technologically savvy in the world.
The banks continue to bang the cross-selling drum, while net interest margins narrow (although they may have bottomed out), and they keep on chipping away at their cost bases.
With the cajas off limits and only a few medium-to-small-sized banks rumoured to be for sale – Banco Urquijo and Bankinter among them – two of the three largest banks in Spain are concentrating on new business, diversification, foreign acquisitions and expanding the products they sell in Latin America. The bank that could still be interested in a domestic acquisition is Popular.
Home loan growth
Grupo Banco Popular, the third largest listed bank, has seen mortgage sales continue their dizzying ascent, as have most other banks. They grew 26% in 2005 and are now 55% of total loans, which the bank insists is not excessive because of the quality of their mortgages.
The market looks like it will have a soft landing (see Spain intro, page 62) with mortgage growth slowing, say analysts.
In order to fulfil its Suma strategic plan, Popular needs to deliver e1bn of net attributable profit this year, following a 35% rise to e878 last year.
“We are on the right track,” says CEO Francisco Fernández Dopico, who admits it may be necessary to lose some market share in a bid to reach the target. The bank’s big bet is the e350m it has spent in the past three years on state-of-the-art commercial finance technology, including consumer finance. Mr Fernández Dopico explains: “On a European basis we have the most modern systems and have a three-year contract with IBM in which it will be responsible for keeping Popular at the top in terms of systems, whatever technology is needed.”
He also says the bank is looking for opportunities outside Spain in consumer finance.
Meanwhile, in Spain it is selling consumer credit to its clients, 33% of whom are tied to Popular with a minimum of four products, such as a pension plan. It also has a good accretion rate: 500,000 new clients join every year.
Popular’s historic specialty in small and medium-sized businesses has served it well as it is a profitable area that has not suffered too much from competition and has allowed it to offer private banking to the owners and their families.
Popular could certainly benefit from being larger and reportedly turned down the opportunity to buy local bank Banco Urquijo because of the price. Mr Fernández Dopico says: “I hope another bank comes up that we could buy. Many banks have appeared across our desks but we have price and other conditions [to ensure] the acquisition would not destroy margins.”
In the meantime, it is expanding its Portuguese operations from the current 190 branches to a planned 400 in 2008, and says it is interested in buying another bank there to expand market share.
Mexican wave
Grupo BBVA reported a 30% rise in net attributable income in 2005 to e3.8bn where, for the first time, the contribution from the Americas was more than that of retail banking in Spain and Portugal, with its Mexican bank Bancomer seeing profits rise 56% and contributing one-third of the group’s results.
As well as its usual business mix, it is involved in two high growth areas: immigrant banking, which leverages its presence in Spain and Latin America, and remittances.
The rise in emigration to Spain – immigrants now make up 8.5% of the country’s population, compared with 2.3% in 2000 – is evident in the shops and hairdressers in Madrid’s upmarket Salamanca district, let alone the outlying commuter areas. Estimates by the National Institute of Statistics suggest the number will rise to 11% by 2010. Around one-fifth of all immigrants reside in Madrid.
This provides a golden opportunity for the banks. Until a few years ago, remittances were mainly made through institutions dedicated solely to that function, plus a couple of banks and savings banks. In the past few years, BBVA has upped its involvement in banking services to immigrants by creating Dinero Express.
“Now immigrants are asking for basic services but as they become more secure in their work and more consolidated [in the country] they will end up equalling the average Spaniard in products,” says Miguel Angel Muñoz, who is responsible for immigrant banking at BBVA.
Immigrant banking
Currently, BBVA calculates that 79% of immigrants (from outside the EU) have been in Spain for up to five years, which means the services they need range from simple banking needs to small consumption credits, while after the fifth year they need mortgages, pensions and to finance their childrens’ studies.
But many of them are put off by the ‘establishment’ feel of main bank branches. Thus in 2005, Dinero Express opened its first branch, with bright colours, staffed by immigrants, open 364 days a year, from 10am to 10pm, with the busiest time being 6pm onwards, since Latin Americans are 60% of the immigrants to Spain and this is the best time for contact with their families.
The branches draw in the clients by offering cheaper telephone calls and internet access, posting job offers and rental opportunities and providing a packaging service. The ‘Cuenta Clara Internacional’ on offer is a current account with a difference. For €5 a month it includes, among other services, 12 remittances, mobile phone services and a 24-hour legal assistance phone line.
“Being a bank, we are not a bank,” says Mr Muñoz.
As a result, at the end of 2005, Dinero Express had 40 branches, 26,000 clients and had granted €10m in credits. The branches, says Mr Muñoz, break even in a maximum of 16 months, while a normal branch can take about two years.
“You need to capture the immigrant when he or she arrives in the country as it becomes more difficult with time. That is why we started Dinero Express. Immigrants who are more established in the country can use BBVA’s branches,” says Mr Muñoz.
One of the reasons for BBVA’s focus on immigrants is its expertise in remittances, present through its Mexican subsidiary BBVA Bancomer, the leader in US-Mexican remittances.
Remittances are one of the services offered by Dinero Express but for BBVA they represent a much larger bet. In 1995 it created Bancomer Transfer Services (BTS), a subsidiary of its Mexican bank that was licensed to transfer money abroad from the US.
Ten years later, it processed more than 19 million transactions with a value of $7.4bn. It was responsible for about 40% of the remittances to Mexico from the US – BTS was in fact the largest buyer of pesos in Mexico. It has a state-of-the-art technological platform dedicated entirely to electronic money transfers and has 35,000 third-party point-of-sale locations in the US, including banks such as Wells Fargo.
“The platform is not easy to replicate because we could not buy it, we had to develop it with the authorities,” says Moises Jaimes, president of BTS.
BBVA has used this expertise to expand its remittances operations in Latin America but, as Mr Jaimes points out, there are no geographical limits when it is a point-of-sale business allied to technology. Thus BBVA’s decision to sign an agreement with Bank of China, one of the country’s top four banks. Immigrants outside China can send remittances through BTS to the 11,600 domestic Chinese branches, first from the US and then from other countries to which they have emigrated.
About 10% of the Chinese immigrant population is estimated to live in Canada and the US. China receives about $12bn in remittances from around the world, according to 2002 World Bank figures, and more than 90% of this is transferred outside the banking system.
With the addition of agreements with Bank of the Philippine Islands and ICICI Bank of India, BBVA now has exposure to the four countries that are the largest recipients of remittances. The business looks like growing substantially and giving BBVA a unique selling point.
Acquisition trail
Rival Santander, meanwhile, continues its support of M&A investment bankers. “Despite the bank’s good earnings evolution and the strong outlook, both from Abbey and Latin America, we remain cautious on the stock, as we believe there is a systemic acquisition risk,” says analyst George Karamanos from research firm KBW in a recent report.
That is both Santander’s strength and its weakness. On the one hand, it looks like an efficient acquisition machine, as evidenced by its transformation of UK bank Abbey using its top technology (see page 132). On the other hand, investors need to be willing to embark on a potentially bumpy ride, without knowing where the next acquisition will come from.
Top management at the bank makes no bones about its interest in further shopping sprees. As The Banker went to press, rumours about it bolting on the UK’s Alliance & Leicester or Allied Irish, the second largest Irish bank, were rife.
Its October acquisition of a 20% stake in Philadelphia-based bank Sovereign Bancorp – with the option of acquiring full control of it in two years and of a New York bank (Independence Community Bancorp), which Sovereign is in the process of taking over – is probably not big enough to fulfil its US ambitions. Sovereign posted pre-tax profits of $581m last year.
Meanwhile, in Italy, its long-standing 8.5% stake in San Paolo-IMI should soon be increased. A shareholder pact that controls the bank runs out in April 2007. With the resignation of Antonio Fazio, the governor of the Bank of Italy, who was intent on creating national champions, foreign banks are now welcome to take over Italian ones.
But the most impressive growth is coming from Latin America, with revenues up 40% year on year in the first quarter. And the bank says it is not looking for acquisitions.
“We have a large enough number of clients – 20 million – to grow organically [in the region],” says José Juan Ruiz Gómez, head of strategy for Latin America.
Retail focus
Santander is concentrating on retail banking, with the emphasis on selling more savings and pension products and on bringing more of the population into the banking system because that presents the best opportunity and lowers the risk. A crisis in global markets would not have as dire an effect on retail banking as on corporate banking.
“Latin America won’t be immune to an international crisis but it won’t go bust,” says Mr Ruiz Gómez. “ It is now more stable, has built strong international reserves, internal savings, macroeconomic discipline, low inflation levels, sustained economic growth and fiscal surpluses, which make the region far less vulnerable.”
Almost 80% of Santander’s assets in the region are in Brazil, Mexico and Chile; the latter two are investment grade while Brazil looks like being investment grade in the next few years.
Its approach is regional, producing funds and other products which can be used in all its markets. The bank aims to lower its cost/income ratio of 48% to 40% in the region. Currently, all its banks in the region are incorporated into the same ALTAIR system – Brazil was the last to join in the first quarter of 2006.
Therefore, Spanish banks are profitable, well-managed entities with a grasp on costs through technology envied by many of their competitors. Their exposure to mortgages in their domestic markets is not as worrying as appears at first glance, while consumer credit is a growing business. Meanwhile, Latin America provides Santander and BBVA with an exposure to high growth emerging markets, as more of the population enters the banking system and buys more products.
Spanish banks are showing inventiveness and agility in their domestic and international markets – perhaps more so than some of their global competitors.
