Javier Valls, chairman of Banco Popular Espańol, tells Karina Robinson about the strategy he and his brother Luis are using to ensure the bank remains successful and efficient.
There was an absence from the table as I lunched with Javier Valls, chairman of Banco Popular Espańol, one of the best banks in the world. His brother, Luis Valls, is a member of the Opus Dei religious order and eschews a public profile.
“Luis Valls does the strategy. [He is all about] frugality and austerity. The best banker the country has had,” says the president of a top Spanish bank.
Since Luis Valls shares a monastic cell in one of the religious order’s homes, Javier – who says he is not a member of Opus Dei but jokes that some say he belongs to “Opus Night” – is the public face of the bank. Other heavy-handed jokes follow throughout a lunch of hake and green beans, washed down with a bottle of Marques de Riscal 1998, in the bank’s characterless headquarters in central Madrid.
“He is Florentine and I am Roman,” says Javier Valls. “We complement each other. When my brother goes to Milan and I go to London, we find we have bought the same jumper in the same colour. I do more of the bank’s external affairs and he does more of the internal affairs,” he says, with an unexpectedly gap-toothed smile.
Shrewd business brain
Sir Brian Pitman, a former head of UK bank Lloyds TSB, agrees. “Behind that urbane exterior [of Javier’s] lies a shrewd business brain that has not been distracted by the latest business fads.”
A few impressive statistics paint a picture of an impressive bank. Although only the 113th largest bank in the world by Tier One capital, in The Banker’s Top 120 Banks it ranks 15th in terms of capital as a percentage of assets, seventh when measured by pre-tax profit as a percentage of assets and third in terms of its cost/income ratio. To put this into perspective, the largest bank in the world, Citigroup, stands at number 42, number 12 and number 29 for each of those categories.
What is the secret? Shunning far-off foreign adventures is one.
In the past couple of years, when the Argentine economy collapsed and Brazilian markets yo-yoed, Banco Popular avoided the fate of the two largest Spanish banks, BBVA and Santander Central Hispano, whose results and share prices suffered due to their Latin American exposure. “People think we are very conservative [but in fact] we have been in Latin America, had the experience and because of it we did not return,” says Mr Valls. “I always thought Argentina could not do worse but it always does.” He then tells me a long story about the bank’s Argentine connection in the 1960s.
Foreign foray
Instead, the bank surprised investors, 58% of whom are foreign, when earlier this year it invested abroad in Portugal’s Banco Nacional de Crédito Imobiliário (BNC), having calculated that the returns could be as good as their Spanish ones. As Roberto Higuera, the energetic chief financial officer of Banco Popular pointed out in a meeting after the lunch, the Spanish bank is the result of the integration of 11 financial institutions, so assimilation is something with which management is familiar.
As 70% of BNC’s business is mortgages, Popular is seeking to diversify it away from this and into a Portuguese version of its business model (although BNC’s numbers have certainly helped the latest consolidated results – Banco Popular posted a 10.7% increase in net attributable profit to E523.35m in the nine months to the end of September 2003). The model consists of developing relationships with its clients – professional associations and small and medium-sized enterprises (SMEs) – that are the envy of banks throughout the world.
Corporate peculiarities
On the corporate governance front, the situation is a bit peculiar. For instance, what is happening in terms of succession planning and retirement for 73-year-old Mr Valls and his 77-year-old brother, Luis? “The future is uncertain and while the bank is going well…,” says Mr Valls, trailing off. “We have a retirement age for executives but it is the opposite for the board – it’s like a senate. But we do have some of the youngest bank executives.”
And how do the Valls brothers control the bank? Mr Valls says they have stakes of less than 1% but that they control about 35% of the voting rights through a pact with other shareholders like German insurer Allianz. Still, when a bank delivers a 35.2% return on average capital with a cost/income ratio of 35.5%, no investor will complain.
Plans for growth
The bank plans to continue growing its market share and its efficiency. In terms of revenues, it is making great headway with the SME market, for which growth has been in the order of 10%. In each of the past three years it has gained 30,000 new SME clients. It is also looking for big revenue increases in private banking from 2004, as it puts the finishing touches to its Popular Banca Privada arm. The bank believes there is an opportunity to grow private banking business among SME owners: although its SME clients do 70% of their business banking with Banco Popular, they only do 20% of their personal banking with the bank, says Mr Higuera.
Another strategic area is consumer finance. The bank has spent E29m to June 2003 on improving its technology, part of which is going into the development of a platform that is capable of sophisticated credit scoring. “We will be pioneers,” says Mr Higuera. The launch is due to be in June this year.
Mortgage market
In the traditional retail area, Popular’s agreements with, for example, medical group Organización Médica Colegial (OMC) means it has a captive client base to whom it sells many products. It has now added mortgages to its product list. In the past few years, as net interest margins have declined and the stock market’s lacklustre performance made investors wary, mortgages have been the saviours of many Spanish banks.
Residential property prices have risen an average of 15% in each of the past three years but Banco Popular believes that fears of a property bubble are exaggerated. Demand has come from more 30-40-year-olds coming to market, more immigration, foreigners buying second homes and Spaniards buying second homes to rent due to a lack of alternative investments. The bank foresees high prices and high levels of family debts progressively pushing down demand so that by 2005 prices would be stable. As a result, the bank is being “selective” about granting mortgages, says Mr Higuera.
“We are still fishing inside our client base as only 4% of our clients have mortgages with us. We are not knocking on the door of unknowns since that way you catch bad clients as well as good,” he says.
Acquisition rumours
Rumours in October that the bank might bid for Banco Atlántico, a medium-sized bank which is up for sale, are untrue, says Mr Valls. “They want to sell themselves for more after Banco Zaragozano sold itself well [to the UK’s Barclays Bank]. [Taking it over] would create problems of personnel and duplication of branch networks. But if it were a reasonable price, fine. Maybe a foreign bank, or a colleague who would like to surpass us, might be interested,” he muses, grinning, and proceeds indiscreetly to mention Banco Sabadell’s chairman and CEO José Oliu. (As The Banker went to press, Sabadell had indeed placed a bid.)
Mr Valls serves on a number of international boards, which he himself admits is a matter of prestige rather than anything else. He has a degree in law from the University of Barcelona and speaks English, French, Dutch, Italian and some German. He gives the impression of a bon viveur, who is surely not clever enough to have developed one of the best banks in the world.
Sir Brian disagrees. “Whenever you get a duo like that [Luis and Javier], someone takes the higher profile role. It doesn’t mean they have less brains,” he says.
Still, I look forward to meeting the absent strategist.
