The Big Question: Why are Spanish banks in such rude health when ours are ailing?
Tuesday 30 September 2008
Why are we asking this now?
Spain's biggest banking group, Santander, yesterday galloped to the rescue of Bradford and Bingley, the latest British bank to hit the skids, saving it from bankruptcy and probably further economic meltdown.
Why is a Spanish bank so keen to expand into Britain?
It's part of Santander's grand plan to become the world's top bank. It is already the leading bank in the Eurozone, No1 in Latin America, and seventh in the world by market share. Once it's consolidated its presence in the British market, it plans to conquer the US. Growth is its watchword. "The aim is to be second to none," the bank says in its characteristically immodest way.
Hasn't Santander already established quite a presence in Britain?
Yes, it chummed up with the Royal Bank of Scotland in 1988 and got a seat on the board, which gave Santander a window on the world that was invaluable when it developed ambitions of international expansion.
Four years ago it acquired Abbey National, and it is still digesting Alliance & Leicester which it bought for a song in July. You have to remember that the Banco Santander began as a local family-run operation in the northern Spanish city whose name it bears. There's not much it doesn't know about how small regional banks work.
So who is the guiding hand behind this grand invasion?
Santander is run by the charismatic Emilio Botin, 73, the latest patriarch of this great Spanish banking dynasty, an astute predator steeped in the business to his fingertips. At the pinnacle of the most powerful business operation in Spain, he is arguably the country's most influential man. When Botin endorsed Spain's incoming socialist prime minister Jose Luis Rodriguez Zapatero in 2004, a jittery stock market calmed down instantly.
How has Santander got this far?
The bank has a record of homing in on distressed banks, even lumbering shareholders with apparently hopeless liabilities, as when it scooped up Spain's Banesto bank in 1995, when it was a multimillion pound black hole ruined by a reckless fraudster. Botin put his daughter Ana Patricia – who will probably succeed when the old man eventually retires – in charge of the operation and she turned it round within five years.
Santander then swallowed Banco Central Hispano in 1995, which enabled it enter the turbulent Latin American market, to the alarm of more cautious operators. Within 10 years Santander consolidated itself as the top bank in the region, and turned its attention to Europe.
How has Santander avoided being savaged by the banking crisis?
Not only has Santander weathered the storm, it has spectacularly benefited from it, announcing 9bn euros profit this year, a staggering 19.3 per cent improvement on last year.
Two reasons, really: first the Spanish banking system is very strictly regulated, largely as a result of a devastating crisis that shook the country's banking industry in the 1970s, and sent many regional and family banks to the wall. The Bank of Spain imposes iron controls in assuming high-risk assets, and insists that ordinary customers be protected from their vagaries. Second, Santander concentrates on retail banking – the unsexy stuff of high-street branches, current accounts and savings deposits – rather than investment banking, or anything fancier. The bank reckons its business is therefore largely immune from market swings.
Santander never got embroiled in dodgy loans or toxic mortgages, which it regarded as too complicated and unacceptably risky. While the world financial system juddered under the fallout of subprime loans, Sanatander declared its exposure to high-risk mortgages as "zero". Botin loftily told his shareholders, "We don't have those strange things."
So how do Spaniards get their mortgages?
Mortgages in Spain are mostly handled by savings banks, which aren't quoted on the stock exchange. Some of these became over-generous in dishing out loans during the recent long property boom, and since the bubble burst many face liquidity problems.
Spain's banking supremos are in general an austere, cautious lot, with none of the buccaneering recklessness of many international counterparts. They are rich, of course, but frugal and philanthropic. If the Botins appear in public, it's probably to endow a university or science park. You will never see them in the pages of Hola!
So how did Santander come out on top?
As well as knowing the market inside out, Santander's top brass, ie Mr Botin, the indusputed boss, has an astute sense of market timing. Last year the bank conducted the real estate operation of the century by selling off all its 1,200 properties at the peak of the property boom, including wedding cake palaces in the heart of Spain's major cities. Pulled off just before the market crashed, the deal netted Santander 4bn euros – which neatly funded last year's purchase, jointly with its affiliate the Royal Bank of Scotland, of the Dutch bank ABN Amro. It cannily held on to all its branches, however – the bits that make money – and even remains tenant of the properties it sold, with an option to buy back in the future.
How will Santander's increased presence affect Britain's high-street banks?
We can expect to see more of Santander's scarlet flame logo as the old names Abbey, Alliance& Leicester and Bradford&Bingley gradually fade away. In acquiring B&B – as in all its acquisitions – the Spanish bank has been careful to peel away and sell off the liabilities it doesn't want, to home in on the elements of its core business: branches, and bank deposits.
So having lots of branches is the key to banking success?
That's the Santander way. It may seem like boring stuff to braver bankers, but Santander believes we need more branches – in Spain there's a bank on every street corner – and that these are the source of steady money, what Mr Botin calls "high-quality, recurrent earnings". However, Santander is ruthless in stripping out what he doesn't need, so bank employees may fear for their jobs.
Will Santander be satisfied, or will it want more of the British market?
History suggests Santander will be eager for another good bargain, especially in the current landscape of smouldering wreckage. The predatory Mr Botin, his coffers plumped with cash, must already be on the alert for further acquisitions, if not immediately. But this is the best moment for him. As he put it recently: "In times of crisis, being better than the others is a big advantage."
So will the B&B takeover benefit British consumers?
*Santander has saved B&B from ruin, and account holders can feel their savings and deposits are safe.
*Santander's low risk policy suggests it will be a steadying influence on Britain's future banking scene.
*Without Santander's action, the alternative could have been a wider meltdown too awful to contemplate.
*Santander's move reinforces the concentration of Britain's banks in the hands of a powerful few.
*Santander has a mixed reputation for its service, and it is strong enough to brush off complaints.
*Savings are better handled by local building societies than by banks answerable only to shareholders.
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