Spain's Santander is moving into a new era as it targets larger earnings, improved customer loyalty and stronger governance. Silvia Pavoni looks at how the 160-year-old institution is planning to progress from a position of strength.

New age of Santander

Since 1857, when it was founded in the coastal northern Spanish city from which it took its name, Santander has grown domestically and internationally to take leading positions in 10 core markets, spanning from Chile in the southern cone of South America to the UK in northern Europe, serving a total of 131 million customers.

Santander’s most recent acquisition – the takeover of Banco Popular in June – is set to consolidate further its position as dominant leader of the Spanish market. With a price tag of a symbolic €1, the takeover of the troubled competitor was “the best deal in Santander’s history”, according to Davide Serra, CEO of hedge fund Algebris.

Santander also managed to inject new life into its Brazilian business while the country was suffering its worst recession in decades, and turned a pre-tax loss in 2015 into the largest income generator for the group, providing one-quarter of its total profits. Digital products have been breaking new ground in Chile and Mexico, and innovative ideas carried out in one market are frequently revisited and successfully introduced elsewhere.

Some analysts have so much faith in the bank’s strategy that they have issued record forecasts. Bloomberg has gone so far as to predict adjusted net income to almost triple that of 2016's €6.62bn, to €17.57bn in 2020. Its forecasts for Spanish arch-rival BBVA, which also has an extensive and successful Latin American network, hovers at €5bn for 2019, the furthest forward prediction available.

So just what will fuel Santander's growth?

A new approach

Santander has been led by four generations of the Botín family. Under current executive chairman Ana Patricia Botín, the business is embracing new ways to improve profitability, customer loyalty and governance.

The most obvious departure from the past is the bank’s diminished appetite for acquisitions: the costly buying sprees of the past are gone. In the case of Popular, it has been reported that Ms Botín ignored calls by the bank’s management until the situation demanded action, and the price tag fell accordingly.

The contrast between the Popular deal and that which helped the group to directly compete with Brazil’s largest private sector names, Itaú Unibanco and Bradesco, almost two decades ago is stark. In 2000, under the leadership of Ms Botin’s late father Emilio, Santander shocked the market by buying a controlling stake in Brazilian state-owned lender Banespa for a price almost four times the minimum the government had demanded, outbidding all other suitors at 7.05bn reais. The more frugal purchase of Popular is a sign of Santander’s different position in the banking world, and also, perhaps, in leadership style. “The world has changed,” Ms Botín tells The Banker. “We’re in a very different environment. My team and I don’t believe in paying too much.”  

The world and Santander have indeed changed, and the senior management’s more pressing concerns relate to digital products and better internal IT systems (so that the bank can remain competitive), rather than costly expansion. This will be a key challenge for the group, given the size it has now reached, and it is the biggest preoccupation of group CEO José Antonio Álvarez. He says: “As a group, overall, [my biggest concern is not] to fail in our transformation process. This will determine what the bank will be in five years, so we have to make sure we do it properly. We need to be able to serve customers in 2022 [and beyond] in a way that is appropriate.”

This has led to a series of initiatives across the group to modernise the traditional offering and run separate products alongside it. Openbank, launched in Spain, is an example: since this June, the digital bank has offered full-service banking products and used a cloud-based IT infrastructure.

“It’s hard to transform a supertanker. That’s why we run what we call 'speedboats': projects run separately from the core of the bank so they can develop faster,” says Victor Matarranz, who until October was Santander’s head of group strategy, and now leads private banking and asset management. Openbank may be exported to Latin America in the future, he adds.

Latam profitability

Latin American operations have provided innovative solutions for Santander and, crucially, the higher levels of profitability the group seeks, led by Argentina’s 36% and Brazil’s 32% attributable profits growth for 2016. Earlier this year, Santander revised its overall 2018 target for return on tangible equity upwards to more than 11.5% on the back of better conditions in some core markets.

Various initiatives have also helped support customer loyalty, for which the group has set a specific target of 18.5 million customers it would internally brand as 'loyal' by 2018. The figure as of June 2017 was 16.3 million. But both in terms of growth and absolute results, Brazil’s performance, in particular, is hard to miss.

Being able to deliver the group’s largest profit contribution in 2016 must have been a relief for Sergio Rial. Mr Rial joined Santander Brasil in March 2015 as chairman and, in a management reshuffle called for by Ms Botín, took over as CEO at the beginning of 2016 with a mandate to improve earnings while Brazil was still deep in recession. “[Our Brazilian operations have] been a growth story and that [was] not immediately clear: how can you be a growth story when the country is in recession?” he says.

After a dive in operating income that led to a pre-tax loss in 2015 – a large tax rebate turned the negative value into a net profit – Santander Brasil showed great improvement with larger loan, deposit and mortgage businesses in 2016. Pre-tax profits were more than $5bn for the year, with a $2.3bn net income. In particular, Moody’s analyst Alcir Freitas notes how the bank contained costs and improved its presence in current accounts and credit cards, while improving in cross-selling products such as insurance.   

Mr Rial says retail operations growth focused as much on improving customer experience as on technology. He highlights, for example, the introduction of the net promoters score (NPS) as a measure of customer satisfaction – something common in other industries, such as aviation, but unique in the Brazilian banking sector. Customers rate their experience through a mobile phone message, helping the group to quantify it and focus on the quality of service provided.

“The NPS is a very acid test because it only considers [a customer with scores of] 9 or 10 out of 10 as a ‘promoter’ – someone recommending the bank to others in their social network or family,” says Mr Rial. “What we’re really spending time on is trying to differentiate ourselves, how our customers, existing and new, experience Santander, which goes beyond not having a problem. Banks tend not to measure customer experience, they [only] tend to measure complaints.”

Santander map

Tech champions

In the digitally competitive Brazilian market, Santander Brasil introduced biometric identification in 2016 so that customers can be recognised simply by their fingerprints, skipping the need to remember and insert codes: 6.3 million out of Santander's 34.3 million Brazilian customers used the system in 2016. The number has since gone up to 8.7 million.

Santander Brasil’s technology efforts have also resulted in opportunities for the wider group. Take SuperDigital, an e-money account linked to a pre-paid card that customers access through a mobile app. It has financial inclusion potential in markets with relatively low bankarisation, but can also provide an interesting tool elsewhere, according to Mr Matarranz. In the UK, for example, Santander has recently run a trial with families for a service targeted at children – inspired by the Brazilian product – which he says proved popular. “In this digitalisation [push] you can learn a lot from other markets. People always assume it is emerging markets that can learn from developed markets but sometimes it’s the other way around,” he says.

The same product could be applied to the Chilean operations, should the local legislation change to allow for the use of such pre-paid cards – something regulators are considering, says Mr Matarranz.

However, Santander Chile has its own prized digital jewels. It is the only operation in the group to be able to offer facial recognition as an identification system to customers, and has also modernised the way customers use the old-fashioned branch. Santander Chile CEO Claudio Melandri says the initiative started from the realisation that bank branches in prime locations, in general, did not make the most of the real estate. And so the lender began to transform them into coffee shops (with “very good coffee” stresses Mr Melandri) that have free Wi-Fi, and co-working areas where staff have a chance to initiate discussions with existing and potential new customers.

“When you have a prime location like most banks have in the world, you need people to come to that location,” says Mr Melandri. “We generated flows of people; we created a place for the community.” He adds that staff can onboard clients entirely digitally at those branches and that he wants to go from the 20 he currently plans to open by the end of 2017, to 140 in 2020. Ms Botín speaks enthusiastically about the initiative and others agree.

After a meeting with the bank, Fitch analyst Santiago Gallo saw for himself what Work/Café was about and was impressed. He believes it will help Santander Chile gain a reputation as an innovative force in the local market.

Mexican initiatives

Other successful Santander digital examples come from Mexico, both in terms of cross-country collaboration and in terms of breaking new ground. There, based on the UK experience of the 1-2-3 account, the bank has created Santander Plus, which offers cash back on deposits if customers use the account to set up regular direct debits with utility providers. This is the only example of a cash-back account in the country, says Felipe Carvallo, an analyst at Moody’s.

Encouraging the use of bank accounts is particularly important in a country that has relatively low banking penetration compared with others in Latin America – despite its large economy, as Santander Mexico’s CEO Hector Grisi knows all too well. “In Mexico, on pay day, people start calling the contact centre early in the morning and check if the money [has been deposited]” he says. “Then they go to the branch and take 100% of the money out. We are trying to convince them to trust the system.”

Overall, digital channels at Santander Mexico are growing: in the first six months of 2017, its number of digital customers had risen by about 30% to 1.67 million. The bank also launched a new platform in October to connect entrepreneurs to universities, called Santander X. It has the support of 40 universities in Spain, Portugal and five Latin American countries, and an investment of €50m over the next four years.

Also in October, Mexico became the first Latin American country in the group to direct Santander’s dedicated fintech venture capital fund to the region. With an investment muscle of $200m, InnoVenture had raised funds for 17 start-ups since its creation in 2014, but these tended to be concentrated in developed markets. In Mexico, its activity resulted in a $6bn investment in mobile payments, ePesos. Others might follow soon. “InnoVentures naturally tended to be more biased towards the UK and the US but in our plans we have a clear priority, a big focus on Latin America,” says Mr Matarranz. “There are tons of opportunities there.”

For many, diving into the digital world often means parting with banks’ old-fashioned, more rigid brands to adopt the cooler clothes of fintechs. As lenders continue to have a bad name in Spain (and are seldom popular elsewhere), gravitating towards fintechs could be tempting for customers. But Mr Alvarez does not buy into the idea that customers always prefer the new to the old. When it comes to money, he says, a traditional name will always beat an untested one: “Branding is more important now, in the digital world, than ever. We’re talking about money – money that needs to be kept safe.”

And when it comes to understanding what customers want, local knowledge is crucial, he adds, which is something that allows him to leverage the international group’s resources more effectively. “Sergio Rial in Brazil knows what customers need in Brazil, Hector Grisi [is the same] in Mexico, Claudio Melandri in Chile. Local knowledge is very important. My job is to make sure we have the right people in the right places,” adds Mr Alvarez.

People and products

Having the right people is crucial for Santander, and not just to hit profits targets. While initiatives to modernise and introduce innovative products continue and earnings grow, the bank is strengthening corporate governance too. In the US, for example, there have been questions over local operations – in particular over the consumer finance business Santander Consumer, which in March 2017 was fined about $25m because of predatory behaviour on subprime auto loans.

Beside improving profitability and customer loyalty, Ms Botín says governance is a key plank in her plan for the bank’s future. She notes how her performance incentives – as well as those of her managers – are based on behaviour. While she demands results, she believes that how people get to those results is important. “Sometimes people do a great job but not in the right way and we need to ask them to leave,” she says.

As results continue to be delivered and numbers of loyal and digital customers grow, all eyes will be on Santander to see if governance will also sufficiently improve where needed, under the bank’s motto that boasts a service that is ‘simple, personal, fair’.

As Santander prepares to enter potentially its most lucrative and transformative phase yet, the bank is right to pay closer attention to employees’ conduct, as well as to service quality. Then it will not only be the finance and investor communities that appreciate its growth prospects and products but also consumers across its core markets.

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