Spain, the land of the siesta and mañana? Forget the inaccurate stereotypes. Spain is the land of some of the most efficient universal banks in the world. The average cost/income ratio for Spain’s three largest quoted banks is 43%, according to The Banker data, and all three have plans for it to fall substantially – by at least 400 basis points – by 2010.
The three, Grupo Santander, BBVA and Banco Popular Español, are involved in financial services ranging from pensions to consumer finance. The first two also have substantial operations abroad in developing markets. They posted increases in pre-tax profits for 2006 of 15%, 26% and 22% respectively (see table).
There are historic reasons for the low cost/income ratios and reasons that are possibly unique to the Spanish market. But there are also strategies that banks all over the world could follow.
Historically, the Spanish banking market was very fragmented, but a banking crisis in the late 1970s led to the emergence of a restructured sector and, of equal importance in the process, a reformed central bank, the Bank of Spain, whose supervisory and regulatory role became crucial in the consolidation of the sector, which occurred over the subsequent decades.
Technological benefits
Much of the profits from sales of the banks’ substantial stakes in Spanish companies allowed them to make large-scale redundancies, says Jesús Martínez, a director at ratings agency Standard & Poor’s in Madrid. With the addition of their major investment in state-of-the-art technology, the outcome is that banks “need many less people despite the increase in their business”, he says.
Strong competition has also played a major role. The entry of foreign banks in the mid-1970s, allied to the existence of cajas (savings banks), kept and continues to keep the domestic banks on their toes.
Large market shares at home (for the two largest banks it is about 15%, although for Popular it is about 5%, albeit depending on the product) and scale in a number of the Latin American markets where they are present have been essential. BBVA Bancomer is the largest bank in Mexico and Santander Banespa is the sixth largest in the much bigger Brazilian economy.
“The bottom line is market share,” says Antonio Rodríguez-Pina, chief executive of Deutsche Bank in Spain, “and good management”.
Banking is, after all, an industry where in-country economies of scale have been the main reason for bank takeovers. The fragmentation and small market share of banks in Germany, for instance, has been a deterrent in raising profitability and, arguably, still holds back Deutsche Bank’s progress.
The issue of management is a crucial one. And the three Spanish banks are outstanding in this regard. But they have also been helped by a factor that their peers in, say, German, Italian and French banks have not seen, namely the increase in the size of the pie in the past decades. Spain’s economy took off as it joined the EU in 1986. EU subsidies, liberalisation and deregulation, plus immigration in the past five years, have resulted in an increasingly affluent country with growth rates far higher than in fellow members of the eurozone (see feature, page 74). In 2006, gross domestic product grew nearly 4% and BBVA is forecasting 3.7% in 2007.
Automation nation
The banks have been able to benefit fully from this because they are central to a Spaniard’s life. Financial services such as mortgages, insurance, pensions and credit cards all go through the banks, unlike in the US, for example, where mono-providers of credit cards and mortgages are common. Plus the system has a high level of automation: cheques are non-existent and direct debits are common.
“The Spanish model is customer-centric while the Anglo-Saxon model is product centric,” says José María Fuster, managing director for technology and operations at Santander. “Go to many UK banks and the card division does not talk to the insurance division – the focus is product profitability. In Spain, it is customer profitability.”
Thus, by selling more products per customers the banks make up for the low margins of many products – on average 0.6% to 1% on mortgages, for instance, and 1.3% on investment funds. Customers are the beneficiaries: a 2006 study by consultancy Deloitte Spain showed that Spanish customers pay less banking charges per capita than customers in the rest of Europe. Spanish financial institutions generate €901 a customer per year, which is on average €194 less than is generated in France, the UK, Germany and Italy.
Customer-centric
Banks in many other countries aim to cross-sell products but have not been as successful as the Spanish. Part of the reason is that Spanish banks give branch directors a degree of independence in deciding how to price products and services for particular clients – the customer base is highly segmented – because the ultimate aim is to strengthen bank-customer ties to ensure the highest possible profitability per client.
Another differentiating factor between Spanish banks and a number of those that follow what Mr Fuster calls the Anglo-Saxon model is the importance given to investment banking. About 41% of Royal Bank of Scotland’s pre-tax profits were derived from investment banking and markets, and 25% of HSBC’s. Arguably, this means management attention to achieving the utmost profitability in the retail and small and medium-sized enterprises banking segment is less than at the Spanish banks, where investment banking profits are much less important, if not negligible.
The Bank of Spain sets maximum tariff levels for financial services and, partly as a result, there have been no mis-selling scandals, as there have been in countries such as the UK. Banks also have a different image in Spain than in many countries, where they are perceived as predatory institutions offering abysmal service.
Banco Popular’s chief financial officer Roberto Higuera points out proudly that of the 437,000 new clients that joined the bank last year (bringing the total number of clients to 6.6 million), 44% said it was on the back of a friend’s advice. That indicates a great degree of existing client satisfaction – something that is unlikely to happen in most other countries. And the bank scored the number one slot by having the lowest ratio of complaints of all banks in Spain in 2005 at less than 3%, according to the Bank of Spain’s table of complaints. (BBVA, a much larger bank, was number three and Santander was number 11).
There are many more branches per head of population in Spain (about 1 per 1000 according to Moody’s) than in many other countries and the three banks are opening more, having realised a few years ago that closing branches was counterproductive. The mindset is about investing in the network, says Mr Fuster, so there is a realisation that savings need to be made in other areas to pay for that. Technology is used to simplify processes and allow more time for client contact. At Abbey, the UK bank Santander took over in 2004, half of all staff were involved in back-office functions; while at Banesto, the Spanish bank kept as a separate brand by owner Santander, only about 6% of total staff are involved in back-office tasks (see page 66).
The three big banks also have branches that are lean selling machines. At Santander branches in Spain, on average 55% of the employees are incentivised salespeople and the rest are there to provide banking services. And Banco Popular’s new branches have only three employees by leveraging their technological platform.
Banco Popular’s new computerised sales system, SAC, will be fully implemented in the branch network by the end of this year. When an operation is carried out for a client, the system will suggest other products that might be of interest and will give the employee a time goal in which to make those sales. The bank’s technology spend increased 30% last year.
Staff incentives
Banco Popular, whose cost/income ratio was 38.2% in 2006, according to The Banker, is seeking to lower that substantially in the coming years. To get there, it is relying in part on a new incentive structure for employees: €35m is being invested in long-term compensation to push sales. However, like the other banks, it is wary of making public the ratio of bonus to salary. Between 10% and 30% appears to be the norm in the Spanish banks.
But Mr Higuera is adamant that the bonus element is not crucial. “Ten years ago, we did not have it but were still a very good bank,” he says, adding that Popular has a very flat hierarchical structure. “Everyone in the bank addresses me with tú [instead of the more formal personal pronoun usted].”
The bank is recruiting more university graduates and has stepped up its training programme. In 2006, every employee had 53 hours of training. “Because people move around [in the organisation], we want even our technology people to understand selling,” says Mr Higuera. “We have a very commercial bank. What shocks us is the lack of commerciality in other countries.”
When it comes to banking hours, though, Spanish banks are as uncommercial, if not more so, than their peers abroad. They open from 8:30am until 2pm. Popular put the cat among the pigeons recently when it announced it was considering longer branch opening hours. The unions would need to accede to this (Spanish banks are heavily unionised), which looks unlikely in the short term. However, if it did happen, the other banks would need to follow suit and, like other non-financial retailers, take into account client convenience.
BBVA sees itself as a distributor of financial products, says Isabel Goiri, head of investor relations. A cost/income ratio of 43.89% in 2006, according to The Banker research, is one that BBVA is also aiming to slash in the next few years. Last year, the bank began a series of transformations that included recruiting 1000 new sales staff and cutting 750 middle-level and central services personnel. In addition, it has reorganised its business units to allow them more autonomy, to create more synergies between them and to foster innovation.
Last year, BBVA’s research showed that time delays and bureaucratic procedures were an impediment to clients taking up consumer loans, for example. Consumer credit in Spain has been growing rapidly but per capita is still quite low, according to Eurostat. So in 2006, the bank trawled through its customer base in Spain and pre-scored four million of its eight million clients. When they take money out of an ATM, it tells them they have a credit of, for instance, €3000 that they can access there and then.
Account managers in BBVA’s Spanish network sold 16.4% more products in 2006 than in 2005, and the average product per retail client is 4.5 in Spain.
Exporting the model
Ms Goiri says the bank is capable of replicating its business model in Latin America. In Mexico, it sells an average of three products per client due to a lower level of financial sophistication, while bringing more people into the banking system is a priority, both for the banks and the government. In the past two years, the bank has added four million new clients there, bringing its total to 12 million. Its cost/income ratio in Mexico is well under 40%.
The big question, however, is whether BBVA can accomplish something similar in the US, where it has made a series of major acquisitions in recent years, including Texas Regional Bancshares, State National Bank and Compass Bancshares. It expects US business to be 10% of earnings in 2008. At the end of the year, once Compass has been integrated, it will have a 6% market share in Texas, a state with a population of 23 million, as well as strong positions in Alabama, New Mexico and Arizona.
Adapting to the US
As noted, US customers are culturally unaccustomed to buying most financial products from one bank, and the direct debit for electricity and other bills that is normal in Spain is seen as “a loss of sovereignty”, notes Jaime Guardiola, the head of Spain and Portugal for BBVA. Additionally, he says, up to 30% of the population do not have a bank account but instead use instruments like retail store credit cards.
The big question for Santander is whether it can export its model to the UK’s Abbey. In terms of cost-savings and other goals stated after the acquisition, it is running ahead of schedule. It is implanting its Partenon platform there, which will help in segmenting the clients and their needs. But turning bank clerks into messianic sales staff – while avoiding any mis-selling – will, at the very least, take quite a long time.
The exportability of the Spanish banking model to Latin America appears to be going reasonably well. But the real test for the two largest banks in Spain is whether they can conquer the two Anglo-Saxon markets on which they have staked their future.BANESTO: A GUINEA PIG FOR NEW IDEAS
