Emilio Botín, the chairman of Banco Santander, explains how the bank's geographical diversification and philosophy of operating standalone subsidiaries has helped it thrive during the worst years of the crisis, and stand it in good stead for the future.

Q. How important is it for Santander to be diversified across different markets? 

A. Geographical diversification is absolutely fundamental for Banco Santander. We are present as a retail and commercial bank in 10 core markets, well distributed across mature economies, where we generated 45% of profit in 2011, and emerging markets, where we generated 55%. No other international bank has leading positions in six G-20 countries. This diversification smooths out our earnings and improves our risk profile.

We are not only diversified in terms of profit; nearly 90% of our customers, more than 80% of our employees and more than half of our shareholders are outside of our home market of Spain. The depth and quality of this diversification is part of what makes Santander unique among major international banks. 

Q. What is the optimum market share that Santander is looking to have in a country to make the operation viable?

A. The optimum share may vary from market to market, but we usually seek to have a market share of at least 10% in countries with a large enough population and economy to achieve critical mass. Without that, it is difficult to obtain the economies of scale we need to be efficient and thus attract the best customers and business. This is part of the formula that allows us to be big as well as efficient.

It is very important in retail banking to have critical mass. You are at a disadvantage when you don’t have it. In Colombia, for example, we sold our operations [in mid-2012] because we only had a 2% market share. We realised it was not enough to be sufficiently profitable and that it would be very expensive to achieve the market share we wanted, so we decided to sell.

Q. Could you explain Santander's philosophy of standalone subsidiaries autonomous in capital and funding?

A. We believe this is the most prudent, transparent and effective way to organise our group. Each unit is autonomous in terms of managing its funding and capital. This assures maximum transparency for customers, supervisors and investors. Our supervisors prefer the subsidiaries model because it creates a system of firewalls within the group that reduces systemic risk. The model also gives us the flexibility to list subsidiaries in their local markets, which exposes local managers to greater market discipline and provides the group with another means to finance local expansion. The initial public offering of Santander Mexico in September 2012 and Santander Brasil in 2009 and the merger in Poland of Kredyt Bank and Bank Zachodni WBK would not have been possible without the subsidiaries model.  

That said, the Santander group is not just a string of independent banks. Besides our very strong corporate culture and shared values, we have global structures in technology, operations, risk management, procurement, training, brand management and other areas that assure we realise our potential synergies as a group.

Q. Why did you decide to float the Mexican unit?

A. This transaction was a perfect fit with our model of standalone subsidiaries and our goal of listing them when we can. We placed 25% as that is enough to provide market liquidity. A 10% stake would not provide sufficient liquidity. This has been our policy in most places, although in Chile we placed 33%. The Mexico capital raising added 50 basis points [bps] to our core capital ratio.

We are very positive on Mexico. We know the country very well, the economy is growing, it has a very good independent central bank, which is important in any country, and it is close to the US, the country's main export market. Most importantly, financial services penetration is low, so there is potential for financial services to grow even faster than the economy. The same is true for Brazil.

Q. How does Santander gain through the use of shared technology and brand identity across its different units?

A. Nearly all our units now share the Partenón banking platform, initially developed in Spain. It is scalable, flexible and adaptable to local markets. It is supported by five global data processing centres, which also back one another up. Having a single platform not only provides huge cost savings but also allows us to implement a similar, customer-focused retail banking model in all our markets. It is also more secure: after the earthquake in Chile [in 2010], we were the first bank to resume operations and provided support for the country’s entire banking sector from our centre in Madrid.

The brand has been absolutely crucial to Santander’s identity and success as a diversified, international group. The strong brand enables us to attract the best customers and the best employees to create value for our shareholders. It is also more efficient, generating significant savings in marketing, design and property management. In marketing, a sponsorship such as Formula 1 is very expensive if you are local but becomes very reasonable if you have a global brand. 

Q. Which parts of the new regulations in banking do you welcome and which are you most concerned about?

A. We welcome the reasoning behind the Basel III requirements for more, and especially better defined, core capital and liquidity. However, we are concerned that the liquidity guidelines do not take enough account of the stability of deposits as a source of funding, and that this could have the effect of restricting long-term lending. We would also like to see regulators and supervisors focus more on aligning methods for calculating risk-weighted assets and accounting rules.

Another area of concern is what has been called 'regulatory overshoot', including the proliferation of local initiatives in addition to what is being agreed internationally. We would like to see more analysis of the overall impact of the new regulatory framework of banks, insurance and securities, as it may have some unwanted results.

I firmly believe that better supervision is needed much more than additional regulation. The supervisor should be close, intrusive and forward-looking. 

Q. The Financial Stability Board [FSB] has released its list of “global systemically important financial institutions” and allocated a 1% additional capital requirement to Santander. How do you feel about this?

A. Putting extra capital into the biggest banks has some merits, but we must remember that small banks can get into trouble too. The FSB has allocated 2.5% to the largest and most complicated banks [Citi, Deutsche, HSBC, JPMorgan] with another 10 banks receiving 1.5% to 2%. We put a huge effort into explaining our subsidiary model and why this means we have very limited systemic implications and should not need to carry large amounts of additional capital.

The subsidiary model protects the parent company and means that the most we can lose in a country is our investment and our capital. If there was a crisis in Mexico or Brazil we would have to write off the investment but it would have no other implications in terms of risk for the bank. We built this structure in a very disciplined way. We are not providing liquidity to the subsidiaries and they fund themselves in the market.

This allowed us to be the first institution to present our supervisor with a living will showing how we can absorb external shocks.

Q. How do you expect the banking industry to change as a result of the new regulations?

A. I expect we will have fewer but stronger banks, with higher capital levels. Profitability is likely to suffer in the near term but recover in the medium and long term.

The new regulatory framework should provide clearer rules and better incentives to avoid the mistakes which led to the financial crisis. This must be accompanied by good supervision and governance, to assure that management is striking the right balance between profitability and prudence. If a bank’s managers get that balance wrong, no amount of capital will protect it. Risk management is the bedrock of any bank’s foundation.

Q. How concerned are you about the outlook for the world economy?

A. I am concerned about the world economy but at the same time optimistic. Governments in Europe, and in particular Spain, are responding to market concerns about public debt. The adjustments they are making are difficult for everyone, but they are needed to create a stronger base for growth. The US appears to be in the early stages of a solid recovery and emerging markets continue to grow by more than mature markets. 

Q. What is the future for the eurozone?

A. The euro and Europe will emerge from this crisis stronger than before. It is essential that European authorities continue to work toward creating a true banking union.

I expect the euro to remain a strong currency relative to the dollar. This means the eurozone’s competitive edge in the world economy will have to come from innovation, productivity and the quality of its goods and services, and not through devaluation against other currencies.

Q. How is the situation in Spain impacting on Santander’s balance sheet and how do you see things going forward?

A. In 2012, our profits will be down because we have made large extraordinary provisions for Spanish real estate loans. Santander will finish the extraordinary provisioning in 2012, ahead of most other banks, and we expect our Spanish non-performing loans [NPLs] to peak at about 7% in the first half of 2013. [Santander’s Spanish NPLs stood at 6.38% in the third quarter of 2012 against the industry figure of 10.51%.] Profits will then start to rebound. Once the Spanish savings banks have been cleaned up and restructured, Spain will have one of the most solid financial systems in the world. We expect the Spanish economy will start to pick up in 2014.  

One advantage for us is that a lot of banks have disappeared during the crisis and there will be fewer competitors. We used to have some 60 banks in Spain, including savings banks. At the end of the crisis we may have about 10. There will still be a lot of competition but not as much as there was.

Q. Financial ratios for banks have changed a lot during the crisis. How do you see things for Santander in terms of loan-to-deposit ratios and return on equity?

A. With loans-to-deposits we are heading for a one-to-one ratio [down from 150% pre-crisis to 117% for the group and 108% in Spain in 2012]. If economic conditions improve we could take it back up to 110% or 120% if we are able to obtain long-term funding at 200bps. In the current environment this kind of funding is too expensive.

We want our return on tangible equity to be 14%. Currently it is 11%. With so much regulation, returns in banking will be less than before the crisis. Santander has 10.4% core capital under Basel II, but the bank could easily manage with much less. The financial crisis has been caused not by lack of capital but by bad management, especially of risk. If banks do not get the balance between risk and reward right, no amount of capital will save them.

Emilio Botín is the chairman of Banco Santander.


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter