Investor's Business Daily
Spanish Bank Sticks To What It Knows Best And Spreads Globally
Monday May 19, 5:52 pm ET
Victor Reklaitis
Spain's big banks stick to what they know.
They have concentrated over the years on taking deposits, making loans and other commercial banking basics.
"This is a characteristic of all of the Spanish banks," said Mauro Guillen, a management professor at the University of Pennsylvania's Wharton School.
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"They decided to grow internationally within the same business -- commercial banking -- as opposed to diversifying into things they didn't really understand."
This approach has helped the country's biggest bank, Banco Santander (NYSE:STD - News), thrive even during the U.S. mortgage crisis. The Madrid-based bank last month reported its 10th straight quarter of double-digit percentage growth in per-share profit. Meanwhile, rivals worldwide have been posting record losses.
"It is a bank that hasn't made forays into dangerous areas such as mortgage-backed securities," said Guillen, who co-wrote the book "Building a Global Bank: The Transformation of Banco Santander." "So unlike many other banks in Europe and in the United States, it is a bank that's solid as a rock right now."
Santander has moved aggressively and gotten into new businesses, but the new ventures generally have been in closely related areas, Guillen told IBD. More than 80% of its profit comes from retail banking.
"Let's grow internationally" is how Guillen describes Santander's strategy, "which, of course, has its risks, rather than try to grow across businesses."
The bank's latest international efforts focus on Brazil. It acquired Brazil's Banco Real last year through its part in a consortium that paid $101 billion for the assets of Dutch bank ABN Ambro.
Santander already had established a smaller foothold in Brazil with its 2001 acquisition of the bank Banespa. Its current overall position in the country is a key strength, analysts say. Carlos Joaquim Peixoto of BPI Equity Research emphasizes Brazil's recent upgrade to investment grade by ratings agency Standard & Poor's.
"This gives an idea of the importance of being present there and taking advantage of the strong growth this economy has been experiencing," the analyst told IBD in an e-mail. BPI has business relationships with Santander.
Santander has become Brazil's No. 3 bank in terms of branches and loans and is No. 2 by deposits. Santander points out that it's the only major global bank with a relevant presence in a fast-growing BRIC country. BRIC refers to Brazil, Russia, India and China.
The bank expects big gains in its earnings from Brazil, which made up just 11% of its total profit last year. Santander also sees a lot of integration work ahead with Banco Real.
"One of the main challenges facing us this year is to ensure the success of our investment in Brazil, which will begin to contribute close to one-quarter of the Group's net profit," CEO Alfredo Saenz told IBD in a written statement.
Guillen, the Wharton professor, says Santander faces typical integration difficulties with Banco Real. They come after the Spanish bank was a bit slow with integrating its previous Brazilian acquisition, he says.
"A lot of people have criticized Santander for not making progress quickly enough with Banespa, and I think that's a fair criticism," Guillen said. "But Banespa is big, Brazil's complex, and they are always competing against capable local banks. It is a tough market."
Santander's reach extends beyond Brazil and Spain. The bank owns Abbey, a U.K. bank purchased in 2004, and a 24% stake in Sovereign (NYSE:SOV - News), a U.S. bank. Other key markets include Chile, Mexico and Portugal.
Santander's branch network is the largest of any global bank, amounting to about 13,000 branches when Banco Real is included. Santander also is listed on several stock exchanges, including in Argentina, Mexico, Portugal, Spain and the U.K., along with the U.S.
Analysts often praise the bank's diversified profit stream. About 55% of earnings come from Continental Europe, with 15% from the U.K. and 33% from Latin America.
Another plus is Spain's unique banking regulations, which reportedly are drawing attention from other countries' regulators after helping Spain's banks miss out on the worst of the recent fallout.
The bank, founded in 1857 in the Spanish port city of Santander, has grown into a global power within about two decades through dozens of deals. That spurs analysts to cite possible problems with recent acquisitions as a risk. They also worry about future acquisitions and the impact of any economic slumps in Spain, Mexico or the U.K.
Recent merger talk has concentrated on Santander potentially buying the British bank Alliance & Leicester or boosting its stake in U.S.-based Sovereign. But Santander's CEO last month said it was no time for takeovers.
"We have ahead of us important organic growth, particularly in Brazil," Saenz said during the first-quarter analysts' call. "Therefore, right now we don't need any (acquisition) opportunities to grow."
Guillen nonetheless argues that an acquisition in the weakened U.S. banking sector is likely within a year or two. The professor says Santander could buy a top-five American bank on its own or through a consortium.
Others also predict that type of move, especially as longtime Santander Chairman Emilio Botin nears retirement and his daughter Ana Patricia Botin appears likely to succeed him. The Sunday Times of London reported earlier this year that bankers "reckon Botin is determined to pull off two mega deals, probably in America and Europe, before handing over to his daughter."
Santander expects per-share earnings growth of 15% in 2008 and 2009. For this year's first quarter, per-share profit rose 37% to 52 cents on revenue of $11.63 billion.
The bank expects to grow by 5 percentage points more on average than competitors. Other global banks include UBS (NYSE:UBS - News), Deutsche Bank (NYSE:DB - News) and HSBC (NYSE:HBC - News).
"In the current environment, many of our competitors are returning to traditional banking," Saenz said in his written statement. "We have the advantage of never having departed from it." |
