Commercial bankers like to project an image of staid conservatism and risk aversion. But wise investors aren’t fooled: Too many banks all too often overextend themselves during economic booms, only to suffer heavy losses and painful retrenching when the cycle turns.
Then there’s Banco Popular Español. It has long practiced the conservative talk it preached. Today it’s sitting pretty.
Though Popular is Spain’s third-largest commercial bank -- with E43.6 billion ($47.9 billion) in assets, it is roughly one seventh the size of either of Spain’s two biggest banks, Banco Bilbao Vizcaya Argentaria and Banco Santander Central Hispano -- it is blissfully free of the bull market hangover that threatens to haunt its bigger competitors for years to come. Popular’s earnings rose 12 percent last year, and it is expecting a 16 percent gain this year -- though its first-quarter result was only 9 percent better than a year earlier. BBVA and SCH, reeling from international losses, particularly from operations in troubled Latin American economies, suffered 2002 earnings declines of 27 and 10 percent, respectively, and they are bracing for further disappointments.
Over the past 12 months, BBVA’s share price has fallen 33.3 percent, to E9.24, and SCH’s 32.1 percent, to E7.01. Popular’s stock, in contrast, at about E42, has declined only 6.4 percent, far outperforming the 30.1 percent drop in the Dow Jones EuroStoxx banking index.
“Our clear and simple strategy has been vindicated,” declares Angel Ron, who became Popular’s CEO last year after 18 years at the bank, most recently as the architect of its highly successful consumer and small-business marketing strategy. “You can’t be in all lines of business or go too far outside of your domestic market. The result is lack of focus and inefficiency.”
Unlike its bigger rivals, which made multiple acquisitions and expanded overseas during the 1990s, Popular stayed close to home and avoided merger mania. It stuck to its core business of retail banking, adding branches and modernizing its back office.
“It’s the best bank in Spain,” Deutsche Kleinwort Wasserstein’s London-based banking analyst, Alain Tchibozo, says of Popular. “It’s the most focused bank in the country, with the strictest discipline when it comes to cost.”
The numbers certainly bear that out: Popular not only earned a record E633 million in 2002, the bank has also posted returns on equity of at least 20 percent every year since 1989, making it the most consistently profitable of the Spanish banks. What’s more, Popular’s 27.47 percent ROE in 2002 topped those of all major European banks. BBVA and SCH, which last year earned E1.72 billion and E2.25 billion, respectively, had ROEs of 12.52 percent and 17.20 percent.
Popular’s preference for focus over diversification and profits over size is ingrained in its culture and personified by its septuagenarian co-chairmen, brothers Luis and Javier Valls Taberner, whose family has effectively controlled the bank since the late 1940s. Luis, whose dedication to the bank is rivaled only by his devotion to the controversial Roman Catholic lay order Opus Dei, sums up Popular’s approach simply: “We want to be like Switzerland -- small and prosperous.”
But some analysts see Popular slipping. Its price-earnings multiple, recently 13.3 against estimated 2003 earnings, was a percentage point better than SCH’s but virtually even with BBVA’s 13.1 -- a sign that investors are growing concerned that the smaller bank can’t sustain its remarkable run indefinitely. The contrarian strategy that served Popular so well could now backfire: It’s fully exposed to the increasingly sluggish Spanish economy and to a retail banking business that is becoming less profitable and more competitive, as BBVA and SCH turn their attention back to their home country after spending a combined E25 billion during the 1990s accumulating subsidiaries throughout Latin America and later writing down many of those investments. The Spanish banking industry’s net interest margins, which measure profits on loan assets, have fallen from 8 percent in 1990 to below 5 percent and are trending still lower.
“Popular’s best years are behind it,” concludes Mauro Carli, a banking analyst and fund manager at Lombard Odier Darier Hentsch in Geneva. “Spain was once an underbanked market, but now it’s a relatively crowded market with tight interest rate spreads.” Adds Helmut Hipper, a fund manager at Union Investment in Frankfurt, “I think it’s fair to ask whether Popular has missed the boat by not buying other retail banks, expanding internationally or diversifying into businesses like investment banking.”
These analysts say that the time has come for Popular to take advantage of its E9.1 billion market capitalization and price-to-book-value ratio of 2.8 (BBVA, with a E29.6 billion market cap, is trading at 1.2 times book; SCH, valued at E33.7 billion, is at 1.3 times book) to finally go on the acquisition trail, linking up with either smaller domestic or foreign retail banks.
Popular and CEO Ron, however, aren’t jumping -- to deals or to conclusions.
“We don’t rule out acquiring smaller institutions here in Spain, but we will never leave our home market, and we will never put our culture at risk by merging,” Ron vows. “Through more than a decade, we’ve proved our ability to grow organically in different economic cycles. There is no reason to think that is about to stop.”
RON HAS HIS WORK CUT OUT FOR HIM. THE Valls brothers are demanding bosses. Despite its success, Banco Popular has had four CEOs in the past decade. Older brother Luis, 76, low-profile and fiercely independent, is the principal power in the boardroom; genial Javier, 70, is Popular’s public face, often representing and speaking for the bank at official functions.
Luis is known to grow impatient with executives who don’t adapt to changing conditions and strategies as quickly as he thinks they should. “It’s characteristic of [Luis] to force out chief executives once he feels their particular talents have a limited use when it comes to pushing the bank forward,” says a Madrid investment banker who knows him well.
Ron got the top job in March 2002 when Luis axed Fulgencio García Cuéllar, who in three years and three months presided over an aggressive cost-cutting and efficiency drive that bolstered the bank’s profitability. Although Luis won’t discuss why García Cuéllar was dismissed, people close to him say it was because the former chief executive lacked the marketing expertise of Ron, who at the time was the bank’s No. 2.
The Valls family’s rule dates back to the late 1940s, when their mother’s cousin Felix Millet Maristany organized a syndicate of friends and family to take over Popular. The bank had been founded in 1926 by a group that included retail merchants from Madrid with a charter to provide financing to the retailing industry. Millet, who made a fortune in the naval insurance business during the Spanish Civil War and World War II, ran the bank until 1958, when he brought in Sevillean businessman Fernando Camacho Baños as nonexecutive chairman and assigned Luis Valls to head the management team. Valls, previously an adjunct law professor at the University of Madrid, served as executive vice chairman until 1972, when Camacho died and he became executive chairman.
Javier Valls, who had been working at the bank as an adviser to his brother since 1963, was named co-chairman in 1989. He and Luis together control just 1.29 percent of Popular’s stock, worth about E113 million, but they wield virtually total control through a handpicked board of directors who own a combined 31.38 percent. Institutional investors own slightly more than half the shares. Frankfurt-based Allianz owns 9.52 percent -- related to a strategic alliance under which Popular sells the German company’s insurance products -- and Allianz supervisory board member and former chief financial officer Diethart Breipohl is the only non-Spaniard among Popular’s 25 directors.
Descended from a family of Catalonian industrialists, Luis Valls has an intriguing mix of passions -- religion, civic affairs, literature (he has peppered Popular’s annual reports with quotations from the likes of Lewis Carroll and Friedrich Nietzsche) and sports (he is an avid tennis player). A prominent voice for liberalization during the reign of dictator Francisco Franco, Valls lobbied government officials to designate King Juan Carlos as Franco’s successor. And as a devotee of Opus Dei -- like his historian father, Francisco, who tutored Juan de Borbón, Juan Carlos’s father -- Valls follows some of the most conservative interpretations of Catholic doctrine. The order, whose name means “work of God,” was founded in 1928 by St. Josemaría Escrivá de Balaguer to encourage influential laypeople to spread church teachings by practicing priestlike holiness in their daily lives. A numerary, or celibate, member, the never-married Valls lives in an Opus Dei communal house in Madrid. Critics have denounced Opus Dei as an elitist, power-hungry cabal; several members are ministers in the conservative government of Prime Minister José María Aznar. Valls insists that he keeps religion and business separate, but he adds that “without religious convictions, I would have been a rascal.”
His brother Javier -- more gregarious, married, the father of two and not a member of Opus Dei -- presides at Popular’s board meetings. Although he is a member of the eight-man executive committee, which meets nearly every week to keep tabs on Ron and the rest of senior management, Javier defers to his strong-willed, ironfisted older brother.
Take, for example, Luis’s handling of Ricardo Lacasa. Named CEO in 1994, Lacasa did much to improve the bank’s efficiency -- one of Luis’s bedrock values -- by upgrading both back- and front-office computer systems and deploying an extensive network of automated teller machines. By 1998 Popular was in its customary position at the top of the Spanish bank profitability table, with a 23 percent ROE. But it was losing market share to the four leading banks: Banco Bilbao Vizcaya, Argentaria, Banco Santander and Banco Central Hispano Americano. Each of the banks had gotten considerably larger through mergers over the previous decade, and in 1999 they paired off to join the international megabank class. BBV merged with Argentaria to create BBVA, which then had E314.4 billion in assets, and Santander combined with BCHA to become SCH, with E365.4 billion in assets.
Before that round of consolidation, Lacasa had the temerity to suggest that Popular preempt its rivals by selling out to Madrid-based Argentaria. Valls recoiled at the suggestion -- abandoning independence, he believed, meant giving up the bank’s commitment to “profitability, solvency and efficiency.” Lacasa resigned under pressure and is now a director at BBVA.
In December 1998 Luis picked García Cuéllar, head of Popular’s Madrid region as well as its human resources department, to be the new CEO. On its still-modest asset base, the bank continued to rack up profits. García Cuéllar finished an effort begun in 1996 to overhaul the workforce; by 2001 the total head count had risen by just 134, to 12,309, but 5,500 employees had been replaced through retirements, resignations and layoffs. The process of creating a younger, better-trained and cheaper staff was wrenching and demoralizing for some, but it helped Popular transform its more than 2,000 branches from passive deposit-taking outlets into multifaceted, sales-oriented financial centers. Under García Cuéllar the bank’s assets nearly doubled, and its share of the commercial banking market in Spain rose from 7 percent to 8.5 percent.
BUT LUIS DID NOT HESITATE TO SEND GARCIA Cuéllar packing when he concluded that the CEO had outlived his usefulness. Surprising outsiders and insiders, Valls turned to Ron, the general manager and marketing whiz whom many credited with directing Popular’s surge. “We rigorously stick to a retail banking model, but if there is a trait that makes this bank distinctive, it is its flexibility within that model,” explains Popular’s CFO, Roberto Higuera. “Only the fittest survive, and so we’ve always appointed the CEO who suited the conditions best.”
The imperious Valls seems to have a knack for picking leadership talent to fit the changing circumstances. He replaced Lacasa when he judged García Cuéllar better able to build on the bank’s technological advances. García Cuéllar was supplanted because he lacked Ron’s marketing skills.
The 55-year-old García Cuéllar, since November the CEO of Banco Pastor in La Coruña, was closely identified with the restructurings and layoffs, which left the rank and file with a bitter aftertaste. Ron, who has a more conciliatory personality, “is the best-suited person in the bank to the top job,” asserts Higuera. “Ron has a knack for being able to impart a belief that even the most difficult problems can be solved.”
The son of a banker -- his father was a risk controller at Banco Gallego, a regional firm in the Galicia region of northwest Spain -- Ron grew up in the Galician capital of Santiago de Compostela. He stumbled into his own banking career accidentally in 1984, when he took a part-time job at Banco Popular’s regional headquarters to help pay for his final year of law studies at the University of Santiago de Compostela.
Taking on a series of risk management and marketing projects, Ron soon realized that banking was a more interesting and dynamic business than he had imagined. He took a full-time job, impressed his superiors with his calm demeanor, and after three years in Galicia, moved with his wife, María del Pilar, a lawyer he had met at the university, to Madrid. Ron spent the next six years building a student loan business and learning his way around headquarters, a squat, gray seven-story building in the business district that is in keeping with the bank’s austere image.
Ron’s most formative management experience came in 1995 when Lacasa appointed him head of Popular’s operations in Asturias and Cantabria, iron- and steel-producing provinces in northern Spain that had gone into an economic tailspin because they couldn’t compete with lower-priced products from developing countries. “I learned how to be agile in what is essentially a traditional business,” recalls Ron. “Our revenues were going down sharply, so we rebuilt our business and made it less focused on mining and steel loans and much more focused on small and medium-size enterprises.”
Ron’s turnaround in the north convinced Valls to put him in charge of sales and marketing for the entire bank when García Cuéllar took over as CEO.
Ron’s now-celebrated marketing strategy had two main targets: affinity groups and SMEs. No Spanish bank had ever gone after professional associations, a strategy pioneered by U.S. credit card companies in the 1980s. Under Ron’s direction, Popular packaged its banking services for professional groups -- doctors, lawyers, plumbers and the like. Today 10 percent of Popular’s customers are in affinity groups, but they account for about 30 percent of profits. Pricing incentives encourage customers to take multiple products, which maximizes per-client profitability. The average affinity customer takes 6.9 products, compared with the bankwide average of less than four.
Ron’s concurrent emphasis on SMEs was well timed. The market was fast-growing and ripe for the picking: Popular’s larger competitors, preoccupied with postmerger integrations, were closing branches and alienating customers. Between 1998 and 2002, BBVA’s branch system contracted 24 percent, to 3,620 locations, and SCH’s 27 percent, to 4,707. Meanwhile, Popular increased its locations by 10 percent, to 2,177. As a result, Popular has increased its SME clients 36 percent in four years, to 350,000. This segment produces roughly 40 percent of total profits.
“What counts for small industrial or agricultural businesses in Spain is not so much products as advice, proximity and intimate knowledge of specific needs,” says Pedro Furtado Reis, a UBS Warburg analyst in London who follows the Spanish banks. “Local branches are key to that, and Popular realized that.”
Remarkably, Ron’s marketing strategy called for little advertising. Over four years the bank increased its number of customers to 4.74 million from 3.5 million, while spending no more than E11 million annually, 5.6 percent of its cost base last year, on advertising and marketing. The bank spends far more -- E82 million a year, or 41.6 percent of its cost base -- on information technology, including a state-of-the-art customer relationship management system to support its stepped-up sales effort. The technology is a key factor in the bank’s ability to keep its staff size steady at about 12,000.
Also holding expenses down is a highly automated call center that accounts for 9 percent of all transactions, and Bank-on-line, an integrated branch- and electronic-banking service that as of the end of March had attracted 23 percent (1.1 million) of Popular’s customers. Bank-on-line clients increased 79 percent in 15 months, and that’s on top of the 77,000 customers who have signed up for the online-only
E-Popular service.
The bank’s technology payoff isn’t limited to customer growth: Popular’s overall cost-to-income ratio was 35.7 percent last year, the best in Spain and well below the European average of 61 percent.
SO MUCH FOR THE PAST. THE Spanish banking market is not standing still for Popular or anybody else. BBVA and SCH have finished closing branches and have begun pouring marketing money back into their home territory. SCH says it will be opening new retail branches later this year, although it will not say how many. Last fall, BBVA set out to counter Popular’s successes of 19982002 by launching a E180 million branch refurbishment and staff retraining campaign. Its goal is to attract 1 million new retail and SME customers by 2005.
Ron isn’t losing any sleep over that. He views the Big Two as lumbering giants that are incapable of matching Popular’s level of customer service: “Their approach is about prices and products, and even if they try to transform themselves, I don’t think they can ever achieve the kind of customer loyalty and profit margins that small, nimble organizations like ours are capable of.” (BBVA and SCH declined to comment on Ron’s remarks.)
Popular may face a more immediate threat from Spain’s vast savings bank network, which since 1995 has boosted its share of the private sector loan market to 47 percent from 40 percent. The country’s 58 savings banks operate 20,000 branch offices nationwide, 8,000 more than in 1988. These institutions are quasipublic entities controlled by boards of representatives of local and regional governments, depositors, employees and charitable foundations -- owners who tend not to require the rates of return that shareholders in publicly held companies like Popular have come to expect.
But Ron professes little concern: “Popular has a more sophisticated commercial approach than the savings banks, which means we identify high-margin, fast-growing products like the affinity packages quicker than they do.”
Ron believes that Popular will be more challenged by slowing economic growth and falling interest rates, but he remains convinced that the bank, with its low cost structure and loyal customer base, can weather any storm. He notes that despite an average 70-basis-point fall in yields on Popular’s loans last year, the bank’s net interest margin slipped a mere basis point, to 4.02 percent. “Our flexibility will allow us to continue managing this business as we always have,” he contends.
Staying the course doesn’t mean that Popular won’t consider business-line extensions or even acquisitions, but they would have to be modest or marginal. Last fall, for instance, Popular paid an undisclosed amount for a 60 percent stake in Iberagentes, a small retail brokerage that is evolving into the bank’s private banking arm. Popular wants to double its share of this lucrative market, to 5 percent, by 2005.
In January, Popular paid E390 million in stock, or 2.2 times book value, for 75 percent of Banco Nacional de Crédito Imobiliário, a E3 billion-in-assets, 111-branch Portuguese bank that specializes in mortgage and construction loans. “Portugal and Spain do a lot of business together, and it was really the only foreign market where we needed to have an extensive network if we wanted to serve our existing clients correctly,” Ron explains. “Now that we’ve bought BNC, however, there will be no further expansion in either Portugal or in any other foreign country.” That also applies to France, where Popular operates 11 branches to repatriate the earnings of Spaniards who work there.
Although Ron says Popular might consider a bank acquisition within Spain, no potential target would do much to boost its market share. Even if Popular merged with the next-biggest commercial bank, Banco Sabadell in Catalonia, it would add only E29.2 billion in assets and 2.52 points of market share, to about 11 percent. “They’d still be dwarfed by SCH [16 percent] and BBVA [17 percent],” observes Lombard Odier’s Carli. “To stay competitive, they may ultimately have to go for a cross-border merger with a much larger European bank.”
Certainly, there are banks on the Continent that would prize a franchise as strong and profitable as Popular’s. Germany’s expansion-minded but recently troubled HVB Group, for example, owned 5 percent of Popular’s shares before unloading them last year along with other foreign interests. France’s BNP Paribas and Société Générale and Italy’s Unicredito and San Paolo IMI are also prospective cross-border acquirers.
Of course, the very prospect is anathema within Popular. “If Ron finds the idea of a sale attractive in any way whatsoever, he’s wise to keep quiet,” says a Spanish investment banker. “The Valls brothers would have his head.”
But Ron may have an advantage over his recent predecessors: The Vallses are getting older, and if Ron survives the trials of the next few years, he could end up as their true heir, in a position to modify some of their doctrine.
But don’t hold your breath. Any discussions of his retirement, Luis Valls says, are “premature.”
