Ana Botín Marks a New Era at Banco Santander

Since succeeding her late father last year, Ana Botín has put a firm stamp on Banco Santander. Now she needs to show that her organic-growth plan can deliver the goods.


Ana Botín learned her biggest banking lesson the hard way — getting fired by her father, Emilio Botín. It happened in 1999, when Don Emilio was about to make his concern, Banco Santander, Spain’s largest lender by acquiring Banco Central Hispano. Central Hispano executives complained that Ana, then just 38, was already being groomed as heir apparent of the combined entity, and they threatened to block the deal unless she left. Santander’s chief was not about to allow his daughter to stand in the way of the biggest transaction of his life. He gave her 24 hours to clear out her desk.

“My father thought it was better for the bank that I go,” says Botín, now 55. How right he was, for both Santander and his daughter. Ana returned to the group after a three-year hiatus, did a standout job running two of the bank’s key subsidiaries, then took over as executive chair of the group when her father died suddenly, 14 months ago. “To me it proves that he always thought first about what was good for Santander rather than about himself and his family or other personal issues,” she says. “And that’s the way I think now.”

Botín is certainly not letting sentimentality keep her from remaking Santander in her own image. In her short tenure at the top, she has strengthened the bank’s capital base and overhauled its management ranks, replacing many of her father’s old guard with highly regarded executives drawn from inside the bank and out. She has turned her back on the wheeling and dealing that Emilio thrived on to make Santander into continental Europe’s largest bank by market capitalization, with operations spanning both sides of the Atlantic. She is focusing on an organic-growth strategy centered around customer loyalty, using products she pioneered in her previous posts, an approach she confidently predicts will deliver increased profits.

In short, Botín has put her stamp on the bank faster and more thoroughly than anyone might have expected, cementing her status as the most powerful woman in global banking. “She hit the ground running and has been applying ideas that she obviously has thought about for a long time,” says Lloyd Blankfein, chairman and CEO of Goldman Sachs Group.

Amid all the change, one constant remains: a basic retail and commercial banking business formula that fits Santander’s heritage and suits the regulatory mores of the postcrisis era.

“What is important is that we have a simple retail-commercial model for mass-market, affluent, small-business and corporate clients,” Botín told Institutional Investor in an interview during a recent visit to New York to meet with top executives of the bank’s U.S. subsidiary. “And we have a simple goal: You may have other banks, but Santander should be your primary one.”

For the most part, investors buy into this strategy, thanks to some careful stroking. One of Botín’s first tasks was to smooth the ruffled feathers of large Santander investors — BlackRock and Capital Group among them — that were miffed at not being consulted before her appointment as head of the bank. When her legendary, 79-year-old father died of a heart attack on the night of September 9, 2014, Ana Botín, then in charge of Santander’s British operations, flew to Madrid from London early the next morning; she was ratified as the bank’s new executive chairman within hours of her arrival. Nobody doubted she was the most capable candidate, but the succession process laid bare the submissiveness of the bank’s board to the Botín family.

“If there was a single issue about which Santander could have done a better job in the past, it was corporate governance,” says Davide Serra, London-based founder and CEO of Algebris Investments, a $3 billion, financial-sector-focused hedge fund firm that has long held Santander shares. “Overall, Ana has brought new accountability, new blood and a fresh start for the bank.”

To begin addressing corporate governance concerns, last November she appointed three non-Spaniards to the 15-member board of directors, a group that has long been dominated by members of the Spanish financial and business elite. At the same time, Botín replaced her father’s CEO, Javier Marín, with then-CFO José Antonio Álvarez; she named José García Cantera, then head of global wholesale banking, as the new CFO. Both are respected by investors and analysts as straight shooters who quickly respond to shareholder concerns with clear explanations of bank issues and strategy. And the turnover didn’t stop at headquarters. Botín pushed through high-level management changes in Santander’s subsidiaries in Brazil, the U.K. and the U.S. to accelerate new policies aimed at increasing cross-selling and improving cost-efficiency.

Wooing big shareholders was crucial to tackling her next big target: shoring up Santander’s capital position. Acknowledging a shortage of capital, which the bank had steadfastly denied during her father’s tenure, Botín raised €7.5 billion ($8.5 billion) in an overnight share sale on January 8. The deal boosted the bank’s Basel III tier-1 common capital ratio to 9.8 percent, broadly in line with the ratios of peers like Spanish rival Banco Bilbao Vizcaya Argentaria, Italy’s UniCredit and France’s BNP Paribas.

“It was quite an endorsement from the market,” says Blankfein, whose firm arranged the sale along with UBS. Santander sold 1.2 billion shares at €6.18 each, a 10 percent discount to the previous day’s closing price. The stock fell 10 percent when trading resumed the following day. The shares have eased further, closing at €5.03 on October 20.

Santander executives say any further regulatory capital needs can be covered by retained profits and cost savings. They also point out that they run a retail and commercial entity with a relatively small investment banking component and thus don’t have the higher risk-related capital requirements of Deutsche Bank or Barclays.

Botín has jettisoned the controversial use of scrip to pay most dividends, a tactic that allowed her family to maintain control of the bank despite owning less than 2 percent of its shares. The scrip was popular among retail investors, who hold about 45 percent of Santander’s stock, because they received high paper dividends of €0.60 a share; their loyalty ensured that Emilio Botín could appoint three board members. But cash is king for institutional investors, and scrip diluted their holdings. They are pleased that Ana Botín has banished the practice and content with the €0.20 cash dividend, worth nearly 4 percent. “That still makes it one of the top yields globally, so nothing to complain about,” Serra says.

All these moves proved a curtain-raiser for an investor-day conference this past September in London, where Botín announced she had no intention of pursuing her father’s frenetic pace of acquisitions. Instead, she is focusing on a loyalty program — known as the 123 account — that she first launched a dozen years ago while running Santander’s Banesto subsidiary in Spain and then used effectively at Santander UK.

The Santander group has 117 million clients worldwide but only 12.2 million it considers “loyal customers,” who make it their primary bank. By 2018 the 123 program aims to add 4.8 million retail and 500,000 business clients to its loyal ranks by offering customers a 3 percent interest rate on savings and current accounts, and rewarding them with Santander shares for signing up for additional, fee-paying products like asset management and credit cards. Santander expects the program to generate €3 billion in additional revenue by 2018. “It’s a credible strategy,” Serra says. “Santander has historically been very good at selling individual products. With the 123 approach more attention is paid to cross-selling. And that should increase the bank’s profitability.”

Still, problems persist at the institution Botín’s father transformed from a provincial Spanish entity into a global giant with €1.3 trillion in assets and a €72 billion market cap. “The challenges roughly balance out the opportunities,” says Stefan Nedialkov, a London-based Citigroup analyst who covers Santander.

The foremost challenge is the recession in Brazil, a market that accounts for one fifth of Santander’s earnings. Executives and analysts primarily blame Brazil for the 21.8 percent decline in Santander’s share price since the beginning of the year, compared with a 1.26 percent rise in the Euro Stoxx Banks Index. Santander actually boosted net income in Brazil by 32.8 percent in the first half of this year, to €1 billion, thanks to the acquisition of a Brazilian payroll lender and tight cost controls, but analysts expect the country’s deep recession to eventually hit earnings. “Our stock has become a proxy for Brazil because it’s one of the most liquid plays on the country,” CEO Álvarez says.

Santander also is under pressure in other main markets. In Spain economic growth has finally returned after five years of deep recession, but loan growth is stubbornly low and margins are being squeezed by fierce competition among banks. Meanwhile, the political risks are rising. In September voters in Catalonia gave strong support to advocates of independence for the country’s northeastern region. Nationwide elections in December may usher in an unstable coalition unable to maintain the economic reforms of the current conservative government of Prime Minister Mariano Rajoy.

In the U.S., Santander’s banking subsidiary will likely fail a stress test for the third year in a row in 2016, and its automobile consumer-finance arm has raised the ire of regulators for making an unauthorized dividend payment. “The issue is affecting us reputationally,” Álvarez says. Botín is blunt about the challenge: “There are questions about Santander’s ability to make it in the U.S.” (See “The U.S. Is Santander’s Weak Link.”)

To be sure, Santander is hardly a troubled bank. Unlike so many other multinational giants on both sides of the Atlantic, it has never needed a government bailout. Nor did it record a single year of losses in the wake of the global financial crisis. In 2014, Santander reported net income of €5.82 billion, up 39.2 percent over the previous year’s €4.18 billion. Net income rose 24.3 percent in the first half of this year, to €3.43 billion.

For all his zeal to create a globe-spanning behemoth, Emilio Botín knew when to batten down the hatches. After becoming chairman in 1986, he spent almost $75 billion on acquisitions in Europe and the Americas. Santander’s red logo welcomed more than 100 million customers in 41 countries. Fueling much of this growth was the construction boom in Spain: Between 1995 and 2009, real estate loans grew by 27 percent annually.

Under Don Emilio, Santander also moved faster than its peers to deal with the inevitable bust. Over the last five years of his life, he lopped €65 billion off the bank’s balance sheet, mainly by writing down bad Spanish real estate loans. He also jettisoned the bank’s subsidiary in Colombia and sold a 50 percent stake in Santander’s asset management business, which manages €154 billion, to private equity firms Warburg Pincus and General Atlantic for €1.03 billion. (They later merged the business with UniCredit’s Pioneer Investments subsidiary, with Santander holding a one-third stake in the combined entity.)

Today, Santander faces an entirely new banking world, reshaped by the financial crisis. “Returning to the profitability levels before the crisis is impossible,” says CFO García Cantera. The bank’s return on tangible equity hovered at about 20 percent before the crisis, but new regulatory requirements mean the bank must hold more than twice as much capital these days. Slower economic growth and lower interest rates have further eroded profitability and dropped ROTE to 11.5 percent in the first half of 2015, compared with 11.15 percent at BBVA and 12.86 percent at BNP Paribas. Santander’s target is to raise that figure to 13 percent by 2018.

Ana Botín is the fourth generation of her family to lead Santander, and the first not named Emilio. She gained the confidence to tackle the bank’s top job from years of preparation — and some painful setbacks. The eldest of six children, she was born in 1960 in Santander, a port on the Cantabrian coast 210 miles north of Madrid, where the bank was founded in 1857. She attended local Catholic schools. As a teenager she took private lessons from Spain’s greatest golfer, Seve Ballesteros. She went on to become national junior golf champion twice, and her younger sister, Carmen, married Ballesteros. “I liked golf and she liked golfers,” quips Ana. She finished her education in the U.S., graduating in 1981 from Bryn Mawr College, in suburban Philadelphia, with an economics degree and fluency in five languages: Spanish, French, Italian, German and English.

Botín then worked for seven years in J.P. Morgan & Co.’s treasury and Latin America divisions in Madrid and New York. Along the way she married an Andalusian aristocrat and financial adviser, Guillermo Morenés, with whom she has three sons. Though the children work in finance, none is employed at Santander. (Her youngest brother, Javier, sits on the board.) Botín is very private about her family but scoffs at the suggestion that the dynastic succession at Santander will continue when she steps down: “The chances of that happening would be very small.”

Ana joined Santander in 1988. Her name and ambition assured a swift rise, but she faced her share of setbacks. By 1991 she was chief executive of Santander’s wholesale and investment banking arm, Banco Santander de Negocios. The unit never became a major investment banking force, but it laid the groundwork for Santander’s retail banking expansion in Argentina, Brazil, Chile and Mexico. Her attempt to build an equity business in Asia following the region’s 1997 financial crisis was abruptly abandoned in 1998. The following year saw Santander acquire Banco Central Hispano and Emilio Botín choose his bank over his daughter. “I really didn’t think I would be back,” she says, recalling her shock at the time.

She spent the next three years launching a technology advisory firm and running a small private equity fund. In 2002 she rejoined Santander as executive chairman of Banesto, then a separate subsidiary and Spain’s fourth-largest bank. (It would be absorbed by the group in 2012.)

In 2003, Botín launched the Cuenta 123, a loyalty program account that would serve as a model for the one she’s rolling out across the group today. She also turned information technology into a key competitive advantage. In 2004, Banesto introduced the Partenón platform, which generated in-depth client profiles to help serve customers and cross-sell products. It followed that with the Alhambra platform. Both were eventually employed across the Santander group. Over Botín’s eight-year tenure, Banesto made record profits; it slashed costs and loans before other banks when the recession hit.

In 2010, Botín was rewarded with the position of CEO of Santander UK. Her father had established a British beachhead in 2004 by acquiring Abbey National, a longtime mortgage specialist that ran into trouble by expanding into commercial and investment banking. He grew the franchise by tacking on two other mortgage lenders, Alliance & Leicester and Bradford & Bingley. But Abbey was consistently rated the worst in the U.K. for customer service by J.D. Power and Associates. “We bought banks that were in really bad shape,” Botín says.

She strengthened the bank’s retail business by importing the 123 program from Banesto. Last year one out of four people switching current accounts — a type of checking account that’s the cornerstone of U.K. retail banking — moved to Santander UK. The bank also boosted its lending to small and medium-size enterprises by 50 percent in the two years after the 123 product was introduced in 2012, giving it a 12 percent market share. “The 123 program seems to have been successful in driving market-share gains in the U.K.,” says Nick Anderson, a London-based analyst at Berenberg Bank. Santander UK also stood out as the largest contributor to the group’s bottom line, generating 21 percent of net profits last year.

The experience of heading Banesto and Santander UK shaped Botin’s notions of how she wanted relations between the corporate center and subsidiaries to change. For a start, she announced at the September investor day that the listing of subsidiaries “is no longer a priority.” Her father had gained a wheeler-dealer reputation by doing a partial spin-off of Banco Santander Brasil on the local market when its price was high and buying back shares when the stock dropped. But because of those maneuvers, Santander was increasingly seen to be trading against investors — or worse, favoring capital gains over the underlying business. The new policy means the indefinite shelving of an IPO of Santander UK. Stephen Jones, who had joined the bank as CFO in 2011 to help prepare for its public listing, resigned in October because of the shift. “It makes no sense to sell shares in good businesses just to raise new capital,” says CEO Álvarez. “After all, we can go straight to the capital markets.”

Botín emphasizes that the five subsidiaries already on local stock markets — Argentina, Brazil, Chile, Mexico and Peru — will retain their listings, which regulators require in some countries.

Another lesson Botín drew from her stint as head of Santander UK was the need for more local decision making. “In the U.K. we went from 90 savings products to six and from 25 current accounts to three,” she says. Now she is pushing for local subsidiaries to introduce new apps on their own, beginning with Apple Pay in the U.K. “If it works well, then maybe share it with our banks elsewhere,” she says.

Besides imposing her own strategies, Botín has brought a much different management style from her father’s. In his last years Don Emilio chose to focus on a few issues that he followed in great depth. Spanish real estate was one: He spent much of his time visiting branches in every Spanish city, talking to local developers about loans as small as €1 million and entrusting broader, weightier issues to his senior executives. Socially, he felt most comfortable hobnobbing with Spanish royals and aristocrats, the prime minister and the country’s business chieftains. Lunchtime often found him on the golf course at Santander’s modern, campuslike headquarters at Boadilla del Monte, a Madrid suburb.

Ana Botín is a hands-on manager, behaving more like a CEO than a chairman and leaving CEO Álvarez to work more as a COO, implementing her strategy. “He focuses more internally, and I focus more externally, dealing with strategy and outside people,” she says.

Botín gravitates to a more international set than her father did. She counts former U.S. secretary of State Condoleezza Rice, U.K. Prime Minister David Cameron and Mexican billionaire Carlos Slim among her close friends. “She is deeply knowledgeable about finance and committed to technological innovation,” says former U.S. Treasury secretary Lawrence Summers, who is a good friend. “She also knows well that to prosper, big banks are going to have to move much faster than in the past.”

But a faster management pace is of little avail if Santander’s main markets are bogged down. A case in point is Brazil.

The bank entered the country through the 2007 acquisition of Banco Real, part of the €71 billion consortium takeover of ABN AMRO. The deal was a stroke of genius for Botín: He covered much of Santander’s share of the cost by quickly flipping Italy’s Banca Antonveneta, which he also acquired under the deal, to Banca Monte dei Paschi di Siena. In the end, only Santander benefited from the ABN AMRO deal. The other two consortium members — Britain’s Royal Bank of Scotland and Dutch-Belgian bank Fortis — badly overstretched and needed massive government bailouts.

Meanwhile, just as Don Emilio predicted, Santander Brasil, the renamed Banco Real, became the group’s biggest profit center, in 2012. It is the country’s third-largest private bank by assets, behind Itaú Unibanco and Banco Bradesco. Today the parent company owns 75 percent of the unit, having bought out some minority investors in 2014.

But lately Santander Brasil has become a focus of investor concerns. The Brazilian government expects the country’s economy to contract this year by 2.5 percent. President Dilma Rousseff is fighting off demands for her impeachment because of a multibillion-dollar kickback scandal at Petróleo Brasileiro, the state-run oil company she used to chair. And the local currency, the real, had fallen by 31 percent against the dollar this year as of October 21. Those woes have been a big drag on Santander’s share price. “The correlation between our stock and the real has been very high,” laments CEO Álvarez.

Considering this background, Brazilian operations did surprisingly well in the first half of 2015, generating 20 percent of the group’s net income. The nonperforming-loan ratio ticked up by just 23 basis points from the first quarter, to 5.13 percent of total loans.

Nonetheless, Botín decided to name her own chief executive, Sergio Rial, to Santander Brasil in September, replacing Jesús Zabalza, who had held the top spot only since April 2013. Rial is expected to continue shifting the portfolio away from riskier, unsecured consumer loans toward more corporate loans. “That’s why they have been able to keep nonperforming loans pretty low,” says Johan De Mulder, London-based analyst for Sanford C. Bernstein & Co. “But sooner or later the macro situation in Brazil will catch up with Santander.”

The bank is responding to the pressure by clamping down on costs. Santander intends to keep spending flat this year even though Brazilian salaries are indexed to inflation, which is expected to hit 9.5 percent. Santander doesn’t expect the economy to return to significant growth before 2017. “What’s important is that we focus on the underlying business,” Botín says.

Spain, which accounts for 16 percent of Santander’s income, is also weighing on the bank’s share price. “Our problems are mainly related to political uncertainties,” says CFO García Cantera.

With elections scheduled for December, the biggest uncertainty is the survival of the government’s economic reforms, including more labor mobility, spending cuts and tax incentives for private investment. Austerity measures have dented the ratings of Rajoy’s Partido Popular, as have the revelation of financing scandals in previous campaigns. Podemos, a left-wing upstart party that surged in the polls last year, has fallen to 14 percent in recent surveys because of fears of a Greek-style crisis if it takes power. The PP and the center-left Spanish Socialist Workers’ Party have gained support lately, with both polling above 20 percent.

“Parliament will be fragmented, with no absolute majority,” predicts Pablo Simón, editor of political blog Politikon. One possible outcome would be a coalition between Rajoy’s conservative Partido Popular and the new centrist party, Ciudadanos. “But that’s no guarantee that the reforms in place will be pushed further or even continue,” says Javier Díaz-Giménez, professor of economics at the IESE Business School in Barcelona.

Spain has become the euro zone’s star performer of late, growing at a 3.1 percent pace this year, more than twice the rate forecast for the 19-member currency club. But Spain’s GDP is still 4 percent lower than it was when it tumbled into recession seven years ago, and its 22.5 percent unemployment rate is exceeded only by that of Greece.

Retail borrowing remains low. New mortgages are insufficient to compensate for the amortization of existing mortgages. Car sales are expected to top 1 million this year, but that is far below the 1.63 million peak achieved in 2006. As a result, corporate lending looks more inviting. Most company loans are for maturities of only two or three years, and the sector is recovering more quickly than households are, but competition among banks is brutal. Margins for corporate loans have fallen by as much as 120 basis points since October 2014, to 2 percentage points, with little evidence of a return to more-normal levels. “I have probably been the most pessimistic banker in Spain in this respect,” says CEO Álvarez. “I can only say the worst is behind us.”

Yet even a drop in margin pressure may not be enough. “Loan growth has to kick in, but I have my doubts about it,” says Wilhelm Heinrichs, a Frankfurt-based analyst for Allianz Global Investors, whose €446 billion in assets include Santander holdings. “Large corporates don’t depend on banks to the extent they used to because they can directly access capital markets.”

With a strong credit recovery in Spain still a few years away, Santander is trying to exploit fee opportunities. Santander and CaixaBank are the market leaders, with fees accounting for 26 percent of revenue, but there is room for growth. Last year Spanish banks charged average fees of 86 basis points on asset management products, less than the 115 basis points charged by Italian banks.

Boosting fee income is the key objective of Santander’s 123 accounts. Under the program Spanish current-account holders earn interest as high as 3 percent on their balances and are awarded Santander shares if they sign up for other financial products, such as credit cards, personal or business loans, insurance or pension products. A customer who takes out a €30,000 loan receives 30 shares, for instance.

Santander has 12.6 million clients in Spain, where it introduced the 123 concept in May. By the end of September, the bank had signed up 500,000 clients for the new accounts; 365,000 of them were existing customers, and 135,000 were transfers from other banks.

The Santander branch on Calle Serrano in Madrid’s Salamanca district, within walking distance of the Prado museum, should be fertile territory for the 123 accounts. Area residents and businesses are affluent, tech-savvy and frequent users of bank services. Yet customers don’t seem enthusiastic. Only 10 percent of the branch’s 4,000 clients have signed up for 123 accounts. According to branch staff, many clients have taken out mortgages or business loans at their primary banks elsewhere and would have to pay fees to transfer those loans to Santander.

To help entice customers to sign up for the 123 program, the branch relies on software that quickly calculates how much cash and shares would be earned, depending on the size of the account and the financial products chosen by the client. An updated version of the Alhambra platform tailors financial products to a client’s income. For example, five different credit cards are available, based on credit limits determined by income and scoring.

According to CEO Álvarez, the 123 accounts in Spain will lose about €30 million in 2015 and break even by next year: “Afterwards we expect to significantly increase the number of loyal customers — and make more money.”

Besides cross-sales from the 123 program, Santander is focusing on greater cost-efficiency as the major contributor to higher profitability. The bank already boasts one of the lowest cost-to-income ratios in Spain: 47 percent. “They run a tight ship everywhere they operate, so I’m not sure they have much more room to cut costs,” says Bernstein’s De Mulder.

But Santander insists it has identified €3 billion in annual costs that could be stripped out by 2018, which would reduce the cost-income ratio to 45 percent. The biggest targets for cuts are branches in developed markets. In Spain, Santander reduced its branch numbers by 30 percent between 2008 and 2014. But Spain still had the lowest population density per branch — 1,250 — of any European country in 2013, according to European Central Bank data. (The euro zone average was 2,250.)

Digitization will be another big contributor to cost-efficiency. Santander predicts that financial product sales via the Internet will double, to 30 percent of the bank’s total sales, by 2018.

No sacred cows will be protected from the efficiency drive, vows Botín. That even includes the golf course at Boadilla headquarters where her father spent so many pleasant lunchtimes. She plans to invite outside companies to pay green fees and help defray the annual €2 million maintenance cost. “Maybe we can’t make the golf course as profitable as the rest of the bank,” says Botín. “But it should at least break even.” •