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Western EuropeDecember 30 2009

Emilio Botín

The chairman of The Banker's Bank of the Year, Banco Santander, describes why the global crisis has largely bypassed his bank, and how the company's focus on customer service and efficiency will help its acquisitions across Europe, Latin America and the US to thrive.
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Emilio Botín

Q: How has Banco Santander managed to withstand the crisis better than most other banks?

A: To sum it up briefly, it is the result of three factors: First, our commercial banking business model, with its geographical diversification in 10 markets, focused on low-risk, predictable business lines that we know well. Second, a culture of risk management embedded throughout the bank. Third, a highly capable management team with huge experience in navigating difficult periods in the economic cycle.

Q: From where do you expect Santander's future growth to come?

A: Our diversification - both geographic and by business lines - gives us a variety of significant sources of growth. We are in the middle of integrating the businesses we acquired in Brazil, the UK, the US and Germany. Each of these will generate considerable synergies in costs as well as in income, which will provide significant contributions to medium-term growth.

At the same time, we will continue to grow organically in our main markets and especially in the emerging markets where we are present. Our global business areas are also growing organically, including global wholesale banking - which has gained tremendous ground during the crisis - private banking, asset management and cards.

Q: Are you concerned that one of the results of the crisis could be a stricter regulatory regime, less favourable to banks?

A: We have some very clear thoughts on this subject. First, it is fundamental that supervisors be rigorous, strict and close to banks to assure a strong and solvent financial system. That has been a differentiating factor in the current crisis, as we have seen in countries that have this model of supervision, such as Spain and Brazil. For example, at Banco Santander headquarters we have more than 60 permanent inspectors from the Bank of Spain working side by side with our staff, analysing our products, our transactions and our accounting as well as the quality of our assets, how they are valued and accounted for, and, naturally, loan quality and levels of provisions. In our opinion, this closeness constitutes 'best practice' in banking supervision.

Second, we believe that the principal of 'more risk, more capital' should be the underlying premise in the debate over proper levels of capital adequacy for banks. In this vein, it is essential that capital ratios are calculated in the same way across borders and banks - especially in terms of rating the quality of capital - to ensure that markets can understand the position of each bank and clearly tell the good banks from the bad banks.

We disagree completely with the idea that a large bank poses a systemic risk just by virtue of its size. We see the exact opposite: if the crisis has taught us anything, it is that a large, well-run bank can be a stabilising factor for the system. The quality of a bank's management and national supervision are much more important in determining the level of systemic risk than a bank's size. Those are the factors that any proposals should be focused on.

Q: What is Santander's formula for reconciling an aggressive sales culture with strong risk management?

A: There are two related factors, one structural and one cultural, that enable us to reconcile our strong sales culture with solid risk management. First, we have a global risk division that is independent of the business units, reporting to the board of directors.

Moreover, we have a risk committee within the board, headed by a vice-chairman of the bank and made up of five board members. This committee is very active - last year it met 102 times to review the bank's risk policies and all transactions of more than €50m to assure they met the group's standards.

At the same time, the board's executive committee, which I chair, meets every week and also spends a good part of its time analysing all types of group risk.

In short, the culture of risk management forms part of the DNA of the bank. In every branch, the day begins with a meeting of that office's risk committee to review the loan portfolio and new transactions. It is a continual process. In this way, each branch becomes, in practice, a risk-management office. This is part of the competitive advantage of having an extensive branch network such as Santander's - it keeps you close to and familiar with your customers.

Q: Could you explain the logic behind the share offer in Brazil?

A: Brazil is a priority market for the bank and we have a plan to expand and grow there that requires capital. We decided that the best way to obtain that capital was through an issue of new shares, which would serve both to finance our expansion in Brazil while strengthening our capital in the country and at the group level.

We also believe it is good practice to have outside shareholders in certain subsidiaries - as was already the case in Banesto - in Chile, in Mexico and in Puerto Rico. Together with the group's management, having outside investors imposes market discipline in terms of transparency, targets and delivery. If you are chairman or chief executive of one of these banks, you are accountable not only to the head office and board of directors of the group but also to your own shareholders and investors.

Finally, it was a favourable moment for the bank and for investors, so the timing was good.

Q: Why, in your opinion, has the Spanish financial system weathered the financial crisis better than those of other countries?

A: There are many factors that can explain this, but I would put particular emphasis on the regulation and supervision of the Bank of Spain. Anti-cyclical provisions, as required by the Bank of Spain, reinforced the Spanish financial system in good economic times so that it was in a better position when the crisis struck. Moreover, the Bank of Spain's supervision, which is very close and strict and which - as I said before - monitors all our financial activities and accounting procedures from a prudential standpoint, prevented to a great extent the development of off-balance sheet activities and the proliferation of complicated financial products or unsupervised securitisations, which were at the root of the international financial crisis.

Q: How do you see the future of securitisation? What will Santander's approach be?

A: For more than two decades, securitisations were an efficient vehicle for funding growth in lending, above all in mortgages and consumer finance. As a result of bad practices, especially in the US subprime segment, this market suffered a serious loss of confidence. It is important that this market begins to function correctly again. For that to happen, more open and standardised practices in risk management, accounting and ratings of these issues must be adopted.

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Roll-out: Santander plans to rebrand its UK acquisitions including Abbey and Bradford & Bingley by the end of 2010

Q: How long will the integration in the UK take? Is Santander interested in further acquisitions in this market?

A: By the end of 2010 we will have integrated all the units in the UK, under the Santander brand. This means there will be just one bank in the UK in terms of staff, technology and business model. We've identified the small and medium-sized enterprise, business banking and corporate segment for potential growth in the country and we believe we can achieve that organically.

Q: How important was it for Santander to acquire all of Sovereign Bancorp? What role will the US play in Santander's future plans?

A: We know the US - the largest commercial and retail banking market in the world - it is an appealing country. The investment in Sovereign fits in very well with our geographic diversification, which combines a presence in mature and emerging markets. Moreover, Sovereign is located in the most favourable area of the US, the north-east coast. Our priority today in the US is to restructure Sovereign, aligning it with Santander's business model and organisation to turn it into the leading bank in terms of efficiency and customer service, as we have done in other markets.

Q: How do you feel about being named Bank of the Year by The Banker?

A: We are of course pleased with this award. The Banker is very prestigious in its sector and this award is an important recognition of the model and strategy of the bank. Our challenge now is to continue being the best bank in the world - that is, the best for our customers, employees and shareholders. We will do it the same way we have done it for more than a century and a half in banking: with hard work, determination and ethics.

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