Trimming off unprofitable Latin American business and expanding further in Europe are just two prongs in Emilio Botin's strategy for Santander Central Hispano. Karina Robinson reports.
Santander Central Hispano (SCH) has already had a whirlwind of a time this year; the rest of the year could see a hurricane. Following the departure of the Central Hispano team, including chief executive Angel Corc-stegui's departure in February, chairman Emilio Botin and his top executives have not paused for breath after taking control of the eurozone's third largest bank by market capitalisation and Spain's largest.
The planned moves include getting rid of unprofitable parts of the Latin American franchise, buying Germany's AKB bank and sorting out the Argentine mess. As for the bombshells, these could include buying a majority stake in Mexican bank Bital and the probability that SCH will be the pioneer in a European cross-border takeover or acquire a US bank.
Mr Botin's justified reputation as a visionary, brilliant banker is accompanied by a delight in surprising the markets. In the past, for example, he denied any interest in Spanish bank Banesto which he then acquired. In an interview with The Banker in late March, he insisted SCH was not going to buy more in Latin America. Three weeks later the bank more than doubled its stake in Bital to about 30%. It also made E900m from selling a stake in construction company Dragados in April for a 60% premium, allowing it to shore up its capital, ready for new opportunities. Although Mr Botin has ruled out a major share issue this year, he does not rule out one next year if an interesting target appears.
Profitable business
The bank's estimate of 10% growth in net attributable profit this year to E2700m, which would make its shares fully valued at current prices, is deemed conservative even by management. Chief executive Alfredo Stenz admits that at the time the forecast was put together, the scenario of stable interest rates in the developed world and more uncertainty about Argentina led to a conservative budget.
"A scenario of rising interest rates in the US in the second half of the year could have a favourable impact on bank margins but we won't change our public target of a 10% rise in net attributable income until we have a clearer picture after our second term results," he says.
Cost-cutting is a major component in the equation. The bank's cost/income ratio of 54% - high compared with that of its Spanish peer Banco Bilbao Vizcaya Argentaria, which is down to 50% - is programmed to fall by two percentage points by the end of the year. A so far unnamed project using new information systems which will be fully implemented by the end of 2004 will give a major boost to efficiency, leading to the disappearance of the back office and a cut of 4000 in staff.
Mr Sáenz says cost cutting is already in train. "The focus of the bank is going to be less on cutting costs and more on increasing revenue," he says.
Latin American angle
Latin America is the region with the highest growth possibilities, despite the Argentine crisis. Last year it delivered 45% of profits. Brazil, Mexico, Chile and Puerto Rico represent 90% of the group's earnings there (the bank includes Puerto Rico in the Latin American region due to its risk profile). SCH's goal is to double its current 9% return on equity in dollar terms in the region. It is an ambitious goal but not unachievable. Some of its investments in the region, like Brazilian bank Banespa, are relatively recent and the restructuring has yet to fully feed through.
"For Banespa, it looks like it will be able to generate profits of $750m by the end of 2003, which implies a return on investment of 15% - rather acceptable for such a short time," says Mariano Colmenar, a director at CSFB in Madrid. Charges of over-paying for the Brazilian bank in November 2000 have faded now that the earnings are starting to come through. And no-one doubts the head of Latin America at SCH, Francisco Luz-n, when he says that Banespa will sell five products per client in two years, double the current 2.5, helped by the current implementation of the Altair technology system.
Earnings potential
There are, however, three problems for SCH in Latin America. First is its investment at the height of the internet boom in Patagon, a financial services internet company, which Mr Bot'n admits was a mistake. It is negotiating the sale of the international part of Patagon and is using part of the Dragados sale money to amortise the goodwill. In all, the bank invested $800m in the company, although part of the money went to Patagon Europe which is now turning a profit. Second, SCH lags at number three in terms of Mexican market share and Mr Sáenz admits that growing organically is very slow. The bank aims to get to 20% from its current 14%. If it manages to take over Bital, which has one of Mexico's largest retail bank networks and in which SCH just increased its stake to around 30%, this would give it the size needed. But Dutch bank ING is due to buy 17.5% and Bital's Mexican management has said it is not interested in a Spanish takeover.
Analysts are optimistic about the earnings potential in Brazil, mainly because of management's efficacy. "Mexico and Brazil between them represent 74% of the group's Latam earnings," says Mr Colmenar. "Even if the macro outlook were to disappoint in those countries, there are microforces which the bank can control, such as cost cutting and fiscal credits which provide visibility to future earnings." Banespa, for example, has $3bn in fiscal credits, which means it might not have to pay taxes in the next five years. In Chile, SCH recently increased its stake in Banco Santiago to 78.95% for about $700m.
Mr Sáenz says in any event it is a "win-win situation". Either the bank gains control in a key Latin American market or, if it does not, it can perhaps sell the stake profitably later. The third problem of SCH in Latin America is that Argentina is a disaster. The bank has fully provided for its ownership of local Banco Rio and the goodwill associated with it in a special fund worth E1287m. It has also provided for its pension fund subsidiaries there and it is putting some of the Dragados money aside in case the situation worsens.
But analysts doubt its threat to pull out will materialise. One analyst says: "They use it as a negotiating tactic. They can't do it, though, because they would leave many Spanish companies with no financial backing, while every time there was a crisis in another Latin American country people would fear they would pull out and wouldn't trust them. Also, it would be politically awkward for the Spanish government.".
In the meantime, SCH is reviewing all its operations in Latin America, with a view to cutting back on non-key markets. "The patterns of growth in Latin America have changed and we want to refine our 10% franchise in the region to reflect that. We are in 12 countries," says Mr Luz-n. "At the same time, our objective is to exploit the economies of scale from our region-wide presence and critical mass to outperform our peer competitors."
European strategy
Europe presents a very different picture. The bank is best known in the European Union for its alliances, ones in which it took stakes in a series of banks including Commerzbank, Societe Generale, SanPaolo IMI and Royal Bank of Scotland, aimed at co-operation and in some cases even joint ventures. The strategy for the first two appears to have failed. The bank now has only a 4% stake in Germany's Commerzbank (presumably one it would sell if the price was not so low) and none in the French bank. And its relations with SanPaolo IMI, in which its stake is more than 5%, have been bumpy.
Mr Botin, who does not believe in a merger of equals, says the acquisition of an Italian bank is possible "but there is the position of the Italian authorities to take into account. And the biggest Italian bank is half the size of the top Spanish banks".
Also, there is the need for changes in European financial legislation, which differs from country to country, making a cross-border deal problematic. Another candidate in the rumour mill to tie up with SCH is Royal Bank of Scotland (RBS), in which it has an 8.03% stake (which it may increase to 10%). RBS has a stake of just under 3% in the Spanish bank. Relations are excellent, to the point where each bank has contributed funds to its partner. "That alliance is the anchor of our European strategy," says Juan Rodriguez Inciarte, SCH's executive in charge of Europe who flies to Scotland for RBS board meetings.
Whether the alliance will lead to anything else is not yet obvious. Despite Mr Rodriguez Inciarte's assertion that "we both want to be leaders in our markets and to be independent", he also notes that there are only three markets in Europe that are highly profitable at a retail level: the UK, Italy and the Iberian Peninsula. As SCH is already the third largest banking group in Portugal and the largest in Spain, this leaves Italy and the UK as possible fields for expansion.
A US takeover is also possible because Mr Botin believes "the banks there are cheap. There will be more consolidation even though they have gone up in price quite a bit".
Less high profile than the alliances but an area where SCH is forging ahead profitably in Europe is the consumer financing business. The bank expects to make about E400m from these European operations, excluding Spain where it is the market leader with Hispamer. In Italy it partners SanPaolo IMI in Finconsumo. In Germany, following its acquisition of AKB Bank which it will merge with its current operations there, the new entity will be the largest independent auto financing company. This will provide a boost to the existing expansion of its consumer finance business into Central and Eastern Europe, including Hungary, Austria, the Czech Republic and Poland.
Home base
The base for all these developments is Spain, where the bank makes E1487m in operating income and sells five products per client on average. It is the leader in investment funds with a 26% market share and is a major player in the sale of pension funds, mortgages and other financial products.
The end of the internal wars between Santander and Central Hispano has already given a boost to the Spanish business. Santander's red flame brand now dominates, while the blue shell of Central Hispano is nowhere to be seen. The bank's latest campaign, called "Supersatisfacci-n" and offering new products, has already brought in E3000m, of which one third is new money. Marketing spend last year was only E36m - BBVA spent about three times more - while this year SCH expects to spend about E55m.
The bank aims to increase its 20% Spanish market share by up to 2% in its leading product lines. What will help is the fact that rival BBVA's energies may be taken up with an increasingly important crisis connected with an undisclosed offshore fund.
Banesto strategy
There is, however, one factor that appears at odds with SCH's strategy of cutting costs and expanding revenue: it continues to run Banesto, which has a 7% market share in Spain, as a separate entity. Defending this strategy, Mr Bot'n says: "If we were to integrate Banesto, we could perhaps save E120m but we get more synergies now by having it remain independent. That way we attract clientele through two brands and the two branch networks are complementary." However, once SCH has its new technology system in place by the end of 2004, it will probably unify all its retail brands. For now, though, Banesto is growing faster than SCH and since 1994 its costs have been stable so it is generating more value for the group as a separate brand.
Family business
Keeping Banesto separate also allows Mr Botin's daughter Ana Patricia Botin, who is chairwoman, to prove her credentials as a retail banker, having previously worked mainly as an investment banker. This would allow her to take over from her father eventually, according to the prevailing theory. However, a foreign investor in SCH refers to the chairman's nepotism - including the presence of son Emilio Botin and brother Jaime Botin as non-executive directors on the board - as "an outrage". Both he and another Spanish shareholder say they will turn a blind eye to this until the day Mr Botin fails to deliver value.
As for talk that the bank is a one-man show and that Ms Botin circumvents management reporting lines, Mr Sáenz is adamant this is not true. "Authority here is very clear. On group-wide matters, all business heads report to me, including Ana Patricia and Paco Luz-n. We also have a very good board with independent directors," he says. In response to a question about whether he has ever contravened the chairman, he says: "I have said no to Emilio Botin many times."
The Bank of Spain reportedly caused Jaime Botin to resign recently from the board of Spanish bank Bankinter because it did not approve of the same person being on the board of two top Spanish banks. SCH denies the Bank of Spain was involved. SCH does not apply the same high standards to corporate governance as it does in the rest of its business. One day this will hurt its share price.
Focus on growth
At the moment, though, analysts and investors are focusing on the story of a top bank that has put aside internal bickering and is focusing on its growth. Both Schroder Salomon Smith Barney and CSFB recently upgraded the shares to a buy. The bank's increased emphasis on transparency helped to achieve the upgrade. Mr Botin says SCH is intent on giving a better explanation of what it does. For example, it is revealing how it assigns capital and what return on equity it gets from different businesses.
Greater transparency will help with its future expansion plans, be they in Europe or the US. The fact that its home market is one where banks are the main financial intermediaries, selling pensions, insurance, mortgages credit cards and investment funds, will also help. This role allows it to have a deeper knowledge of bancassurance than rivals from other countries. It already exported this model successfully to Latin America.
The funds for future expansion are not a problem. SCH has an industrial group with a market value of E8000m with E3000m of unrealised capital gains. It includes stakes in Vodafone and a series of blue-chip Spanish companies. And SCH's increasing share price means investors will probably subscribe to the rights issue necessary for an acquisition. The only question that remains unanswered is when it will act.
