Matthew Lynn investigates the rise and rise of the family-run Spanish bank that now has 24 million British customers — and wonders whether its story is too good to be true
If ever a banking deal came with the curse of the black spot, it was the takeover of Dutch bank ABN Amro at the height of the last boom in 2007. Three European banks teamed up to launch a hostile £49 billion raid, the largest financial takeover in European history. Two of them went to a horrible fate: our own Royal Bank of Scotland, which dreamed up the deal, had to be rescued by Gordon Brown, while the Belgium-Dutch group Fortis was itself nationalised soon afterwards. But the third partner, Banco Santander of Spain, not only survived the ABN deal apparently unharmed, but came out of it smelling sweetly of roses.
Santander is the great enigma of European finance. To the casual observer, it has no right to be still in business. It is the biggest bank in what looks like the most bust economy in the eurozone. Outside its home territory, it has been snapping up banks around the world in recent years and taking on new business at a rate that might have made even Sir Fred Goodwin wonder if his foot wasn’t pressed a bit hard on the pedal.
But Santander just keeps getting bigger and bigger, coping with a few losses and minting a fortune from its core businesses. Some City analysts wonder whether it can really have ridden the credit crunch with such consummate ease — or has it, along with the rest of the Spanish banking industry, just managed to hide its true losses in a deep cellar somewhere?
This is far from an academic argument. Santander is now the biggest bank in the eurozone (France’s BNP Paribas is second), measured by market value. With operations in more than 40 countries, it is the sixth biggest bank in the world and, by its own reckoning, the third most profitable.
It has also been the only foreign bank eager to double up its bets on the British mortgage market, taking control of Alliance & Leicester and Bradford & Bingley as well as Abbey. As part of the rebranding of these acquisitions under the Santander banner, it has reassured its 24 million British customers that ‘peace of mind… comes from being with one of the strongest and most secure banks in the world’.
The rise and rise of Santander to become a titan of European banking is certainly one of the more intriguing financial stories of the last decade. Spain has always been a bit of a backwater in European finance. Even within Spain, the historic northern port of Santander — population 184,000, the same as Luton or Swindon — is hardly considered the buzziest place. But that reckons without the Botín family and in particular Emilio Botín, the bank’s 75-year-old chairman and a man who can now make a fair claim to be the smartest European financier of his generation.
Botín was born into banking aristocracy. Emilio Botín-Sanz de Sautuola y Garcia de los Rios, to give him his full dignity, followed his father and his grandfather into the chairman’s office of what started as a small regional bank in 1857. The Spanish press reports how, as a boy, he used to hide behind the curtains listening in on his father’s business meetings.
Botín, suitably enough, means ‘loot’ or ‘bounty’ in Spanish, and there has never been any shortage of that. ‘In Spain a lot of people like to pretend they are rich, but we seriously rich are very few,’ his father, Emilio Botín II, once modestly observed.
Most third-generation businessmen turn out to be better at squandering fortunes than building them. Not Botín. Having joined the bank in 1958, he worked his way up through the branches to become chairman in 1986. A gentlemen’s agreement among the Spanish banks not to steal each other’s customers was ripped up by Botín in 1989 when he started offering high-interest current accounts, and his bank never looked back, riding Spain’s long, EU-fuelled economic upswing with gusto.
In 1999, Santander merged with its biggest rival, Banco Central Hispano — and even though this was billed as a merger of equals, Botín and his family still dominated the board. Over the years, Botín has spent the equivalent of more than £35 billion on acquisitions, including the £9 billion acquisition of the former Abbey National in 2006. Santander had 750,000 customers when he took charge: it claims 90 million now. Surprisingly, in an industry where takeovers often end in catastrophe, very few of Santander’s have come unstuck.
Botín himself likes to put his success down to a homespun style of traditional banking. ‘If you don’t fully understand an instrument, don’t buy it,’ he told an awards ceremony last year, parodying Rudyard Kipling. ‘If you would not buy a specific product for yourself, don’t try to sell it. If you do not know your customers very well, don’t lend them any money. If you do these three things, you will be a better banker, my son.’
He certainly keeps a close tab on the business, micro-managing a vast empire and keeping the chairman’s office warm for the fourth generation. His daughter Ana Patricia Botín is widely expected to take over when Emilio finally steps down — and she’s well qualified for the job. After studying at Harvard, she worked for JPMorgan before joining the family business, and now heads its Banesto retail bank in Spain. Even though the Botíns’ stake is less than 3 per cent, the bank is still run like a family business.
No one disputes that Santander has handled the credit crunch with skill. Its clients lost more than E2 billion with Bernie Madoff, but it doesn’t do much investment banking and made only modest losses on subprime lending. In its latest quarterly results, it reported profits of more than E2 billion. Even its British interests managed to increase profits and market share: Abbey’s profits were up by more than 30 per cent in the first nine months of this year. With chunks of Northern Rock, RBS and Lloyds coming up for sale, don’t be surprised to see the Santander logo on a lot more British mortgages over the next few years. In the City, there is speculation that Botín may buy NatWest out of the train-wreck of RBS.
But there is still a fierce debate about how the Spanish banks have survived the collapse of their domestic economy so well. As a rule, when property markets collapse, they take a few banks with them. Property is the collateral for most loans, commercial and personal, and when the collateral becomes worthless, so do the banks who have lent most, or least wisely.
As in Britain, Spain’s property-led boom has turned to bust, dragging the economy down with it. The Spanish economy shrank by 4 per cent last year, and is still getting smaller even as the rest of the eurozone grows again. Unemployment is at 20 per cent and youth unemployment at 40 per cent.
So how can any bank avoid huge losses in that toxic environment? Supporters of Spanish banking point to a technique called ‘dynamic provisioning’. In short, the Bank of Spain required the banks to put aside a lot more cash in the boom years — fixing the roof while the sun was shining, as George Osborne might put it. Likewise, the tight control of the Botín family, and the concentration on traditional retail banking, kept it away from the dangerous stuff.
Maybe that’s true. There is, however, an alternative explanation, and a slightly more worrying one. ‘Spanish banks are hiding their losses and rolling over debt to zombie companies,’ wrote the London research house Variant Perception recently. ‘Investors are deluding themselves if they believe Spanish banks are among the strongest in the world.’ How’s that trick pulled? Well, one way it is done is by buying up properties themselves. T he Spanish banks, Santander among them, have bought 110,000 properties in the past couple of years, and are now selling them themselves through their own estate agencies complete with generous mortgages. If Northern Rock had been allowed to snap up all the buy-to-let apartments it lent on, it might not have gone bust either.
The truth is probably somewhere in between. Most banks will tuck away their disasters if they can get away with it. Santander has probably taken more hits on the collapsing Spanish property market than it has yet admitted. Even so, the Botín clan has steered the ship with more skill than their rivals. There may, in reality, be something to be said for family control. When you’re doing the same job as your father and grandfather, you probably don’t want to be the one who blows the bank on dodgy mortgages at home and abroad.
And anyone who can walk away from the ABN Amro deal with their wallet intact is probably going to remain a major force — arguably the major force — in European banking for decades to come.
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