Stable Santander Despite Euro Bank Crisis

In a year when Eurozone countries were plagued by a sovereign debt crisis, Banco Santander has offered a bastion of stability in European commercial banking. Its CEO, Alfredo Saenz Abad, was voted the best CEO in the banking sector by sell-side analysts in the 2011 All-Europe Executive Team.

In a year when Eurozone countries were plagued by a sovereign debt crisis that threatened to once-again topple the continent’s financial infrastructure, while contributing to the seemingly imminent demise of the Euro, Banco Santander has offered a bastion of stability in European commercial banking.

Following the announcement of its 2010 results, Madrid-based Santander is considered the number one bank in the Eurozone by stock market value. Santander’s share closed the year at €7.9, propelling its group market capitalization to more than €66 million. Meanwhile, the bank’s dividend remained unchanged from the year prior, at €0.6 per-share, bringing total shareholder remuneration to €5 million.

The steady results are in no small part a result of Santander’s steadfast focus on increasing its capital ratios and maintaining its solvency, long before it was in vogue to do so. “We are a retail bank with a strong focus on efficiency...and a sound balance sheet,” says CFO Jose Antonio Alvarez. He adds, “Three-to-four years ago, this was still important to us.”

Its capital ratio grew to 8.8 percent by the third quarter of last year, a number that is expected to rise to at least 9 percent by the end of 2011. Moreover, after raising funds of €147 million in deposits and medium- and long-term issues, Santander ended the year with a structural liquidity surplus of €127 million.

The bank has arguably been able to enhance its solvency and liquidity position because it is unencumbered by an investment banking division, and so free from much of the excessive risk taking that left other commercial banks in serious debt during the financial crisis. Santander’s main business areas are global banking and markets, insurance, asset management, and credit cards.

Its position has also been strengthened by a hands-on, centralized management model, where the directors meet twice a week and report all day-to-day activities to the CEO. “There is a big involvement of directors in the risk taking process...all significant risk is approved with the participation of the management board,” Alvarez says.


As a result of its long-term focus on strong capital ratios, the bank’s “starting point was much better than its competitors post-crisis,” Alvarez argues. While some of those competitors still need to re-capitalize, Santander’s priorities are shifting from the recovery stage to a point of trying to grow revenues, explains Alvarez.

The bank’s net interest income grew 11 percent, while net operating income increased by 4 percent to €23.8 million in 2010. At the same time, customer deposits grew 22 percent to €616.3 million, while net lending rose 6 percent to €724.1 million. Overall customer funds managed by the bank -- the life and blood of Santander’s strategy to increase market share -- increased by 10 percent to €985.2 million at the year’s end.

However, while net profit came in at €8.1 billion -- landing above the €8 billion mark for the third year in row -- it actually declined 8.5 percent from 2009. This drop was largely a result of Santander’s provision of €472 million of its third quarter earnings in anticipation of new capital requirements mandated for financial institutions operating in Spain.

The Bank of Spain’s new rules, which took effect last week, put the minimum core capital ratio for listed banks at 8 percent. Santander has taken thorough precautions when it comes to capital and liquidity because, Alvarez explains, “We are still facing an unsure environment.” He adds, “Any kind of surprises should be avoided from the regulatory side.” Alvarez admits that a good deal of his time as CFO is spent on regulatory issues. It is important, he says, to participate in “designing a new framework of the global banking industry.”

Alvarez also spent a significant part of his time in 2010 focused on expanding the bank’s presence in burgeoning emerging markets, particularly that of Latin America. There was a “significant shift in where profits came from” in 2010, Alvarez explains. Latin America contributed close to 43 percent of the bank’s profits, with 25 percent coming from Brazil. Meanwhile, the more mature markets of continental Europe, the UK and the US (through Santander’s fully-owned subsidiary Sovereign Bank) contributed 35 percent, 18 percent, and 4 percent to overall profits, respectively.

But Santander is hardly giving up on mature markets. In fact, Alvarez argues that because they are more stagnant, it is all the more important to be aggressive about growing the franchise in those regions--though, he emphasizes, “not irrationally aggressive.” And while growth is slower in Europe -- particularly in the bank’s home country -- Alvarez reminds, “If we look at least year, we have been outperforming [our competitors] in mature markets.”

The bank’s business model has long been built around capturing a significant market share in a limited number of markets. According to Alvarez, Santander essentially operates in ten markets, and must maintain a minimum of 10 percent market share in each. “Understanding local markets” and being able to integrate a local division with the rest of the bank -- be it in Europe, the US, or Latin America -- is key to the model’s viability. “It takes extra time to be sure that we are able to establish the right teams on the a new integration succeeds.”

Particularly in Brazil -- which contributed 10 percent more to the bank’s profits than Spain -- the model appears to be working.