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Western EuropeJuly 31 2005

Santander spots an overlooked opportunity

When Santander bought Abbey, not everyone agreed it was a good idea. But its strategy for turning around the ailing bank has proved the doubters wrong, as Brian Caplen reports.
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Spanish bank Santander’s acquisition of the UK’s troubled retail bank Abbey last November drew a divided response from analysts. Many doubted that a foreign bank could extract sufficient cost savings and synergies to make the takeover worthwhile. Just eight months later, however, the far-sightedness of the move is fast becoming apparent. With hindsight, Santander could see an opportunity that many analysts missed.

“Abbey was the first big cross-border acquisition in Europe, in an environment in which people thought it could not be done,” said Abbey CEO Francisco Gómez-Roldán. The former finance director for the Santander group was speaking at last month’s Fitch Ratings global banking conference in London, one of his first public appearances since taking up the Abbey post.

Merger potential

Mr Gómez-Roldán agreed with analysts that domestic mergers had the best potential for cutting costs through eliminating overlaps in branches and processing but pointed out that there were limited opportunities left in most European countries. (In the UK, for example, the competition authorities rejected an earlier bid for Abbey by Lloyds).

Mr Gómez-Roldán also ruled out mergers of equals: “We don’t believe in them. They are defensive in nature and unlikely to create value.”

But there were “Darwinistic selective acquisitions” that had potential to create value under certain conditions and the Abbey purchase fell into this category, he added.

The Abbey purchase made sense for Santander because the UK bank had a good franchise that was underperforming. “You can’t build anything if you don’t have a good franchise in terms of brand and customer base, and there are opportunities only if the franchise is underperforming.”

From the buyer’s perspective, Mr Gómez-Roldán said, there must be a clear retail business model to export, transferable IT systems and spare management capacity – all qualities that Santander possessed.

Two-phase strategy

The Santander turnaround strategy then followed two phases. In the first phase, improvements were made in customer efficiency (customer retention and the establishment of a new sales culture) at the same time as operating efficiency was increased through better discipline and IT improvements.

In the second phase, value would be created through global synergies and IT economies of scale. “There are global synergies employing Basel II, for example, if you can share best practices with the purchased bank,” said Mr Gómez-Roldán. “This is what we are doing at Abbey.”

He said that everything is on course to achieve £150m revenue uplift at Abbey by 2007 and £300m in cost savings. Staff cuts will reach 4000 by the end of 2005.

Other progress made included putting together a strong management team; the starting of a rebranding exercise in February; the tackling of high levels of turnover and absenteeism among staff; sorting out of backlogs and service issues; and the raising of sales capacity.

“Abbey is one of the less efficient banks in the UK with a cost/income ratio of 62%. It is starting to change but we have a long way to go to achieve the average of the Santander group [47%],” said Mr Gómez-Roldán.

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