Spain's Largest Bank Is Back in the U.S.: Let the Competition Begin, AgainPublished: November 16, 2005 in Knowledge@Wharton
Whether by accident or not, the news that Banco Santander Central Hispano was going to announce another purchase in the United States filtered through the English-language media on the very same day -- October 24 -- that the bank’s top officials were in London making a presentation on Santander’s financial performance, one year after it had acquired British mortgage lender Abbey National.
According to those who attended Santander’s presentation in London, its president, Emilio Botín, no longer speaks with the same thick Spanish accent he did a year ago and he is considerably more fluent in the English language. That’s not surprising given all the practice he has had in recent months trying to rebuild business at Abbey, the only major British bank that has been losing customers. But Botín has also been busy negotiating his return to the United States.
On October 24, Santander announced it had purchased a 19.8% interest in Sovereign Bancorp of Philadelphia (capitalization: $8 billion) for $2.4 billion with an option to expand its ownership to 24.9% over a two-year period and an option to buy the whole bank after 2008. In short, Santander, currently the world’s ninth-largest bank, has returned to the United States, less than a decade after it sold its 29% stake in First Fidelity Bancorp -- for a hefty profit -- to Wachovia. [Editor’s Note: Banco Santander financially backs Universia, a non-profit network of 700 schools and universities in Spain, Portugal and Latin America. Universia is Knowledge@Wharton’s partner in Universia Knowledge@Wharton, our Spanish/Portuguese edition.]
“You could see this coming,” says Wharton management professor Mauro Guillén. Santander’s goal is “to become one of the two or three largest banks in the world.” Given its position “as the biggest bank in Latin America, its share purchases in Eastern Europe and its acquisition of Abbey in the United Kingdom, Santander absolutely has to have a presence in the United States where retail banking is not doing very well. Santander can contribute a lot. We are watching the first step in what will surely be a series of acquisitions over the next few years.”
Sergio Torassa, professor of finance at the European University, agrees, but with some reservations. “Because this acquisition does not give Santander control, you cannot talk about its reentry into the U.S., but only about a first step that can possibly lead to an effective entry through the main gate,” he says. Adds Altina Sebastián, a visiting professor at the Complutense University of Madrid: “This move recalls the strategy that Santander deployed in the United Kingdom when it initially bought a 2.5% interest in the Royal Bank of Scotland. Then, years later, it acquired Abbey, the fifth-largest bank in the U.K. These various stages can be repeated in the U.S.” Santander’s purchase of Abbey National -- its first major investment in Europe -- includes plans to turn Abbey from a mortgage lender into more of a general retail bank in keeping with Santander’s overall growth strategy.
Once news of Santander’s deal hit the media, all eyes turned toward BBVA, the second largest bank in Spain and Santander’s biggest rival. Headed by Francisco Gonzalez, BBVA had already moved into the U.S. last year with its purchase of two institutions, Valley Bank in southern California for $17 million and Laredo National Bank in Texas for $850 million -- deals which confirmed the bank’s strategy of focusing its acquisitions in these two states.
Putting Pressure on BBVA?
Now, however, with the Sovereign deal, the stakes have been raised substantially. In one major move, Botín has invested three times as much in the U.S. market as his rival. Will this acquisition put more pressure on BBVA which, earlier this year, watched as its plans to buy BNL, Italy’s sixth-largest bank, failed? According to José Ignacio Goirigolzarri, managing director of BBVA, “The only psychological pressure we face is to create value for own shareholders.” The bank’s earnings figures for the first nine months of the year show profits growing by almost 25% to reach $3.27 billion (€2,728 billion). ”We are in no rush to make new acquisitions. We are always looking at all the opportunities in the marketplace. Right now, we have to remain calm,” he said.
But has Santander really moved ahead of BBVA? Or had BBVA already gained a competitive advantage in the U.S. during the past year? Neither statement is accurate, say the experts. “The acquisition policies of the two banks are moving along totally different lines,” notes Torassa. “That’s because of their different business strategies, the types of customers they are targeting, their size, and their geographical areas of influence.”
Wharton’s Guillén emphasizes that “BBVA is focusing on the Hispanic market, while Santander has entered the East coast” where it is looking for business not only from Hispanic customers but from “all segments of the population.” Indeed, Santander CFO Jose Antonio Alvarez told the New York Time that “we are interested in retail banks that offer opportunities. [The Northeast and Mid-Atlantic states] are major markets in the U.S. and provide a good footprint to make a financial investment.”
Santander’s strategy is not unique, the Times article adds. “Small to mid-size retail banks in the U.S. have been hot acquisition targets in recent years, as foreign banks look for relatively inexpensive steppingstones into the country, while big American banks look to build up their consumer lending,” the article states.
Sebastián further elaborates on the strategies of both banks: “BBVA’s goal in its U.S. acquisitions is to make progress creating the leading franchise for banking services in the Hispanic community. That’s why it purchased institutions that have a major presence in that market. For example, Laredo Bank operates in a region that has more than five million Hispanics. They are the fastest-growing demographic group not only in Texas, but in the United States. It should be noted that banks are not alone in targeting the Hispanic market, and several industries have been trying to figure out how to cater to more than 33 million Hispanics, who now represent the largest minority population in the U.S. [Note: Opportunities in the Hispanic market form the main theme of a Wharton Fellows program to be held in Miami next month.]
In contrast, Sovereign has developed its competitive skills in one of the highest per-capita markets in the United States, which includes New York, New Jersey, New England and Pennsylvania. One of the goals of the executives who work in its commercial network is for each customer to consume a minimum of six products and services supplied by the bank.”
Sovereign is active in retail banking, corporate banking, asset management and capital markets. It manages assets worth $81.5 billion, operates almost 800 offices and has more than 10,000 employees. Its net profits for 2005 are projected at approximately $900 million. In addition, the institution has an excellent track record when it comes to acquiring other institutions. Since 1990, it has bought 26 different financial institutions and learned how to integrate them quickly and efficiently. One result is that its shares have performed substantially better on the stock market than the S&P 500 Index. The index has risen 150.5% during the last 10 years, while Sovereign’s shares have risen 244.7%.
On the same day that Santander announced the news of its arrival, Sovereign announced it was purchasing Independence Community Bank, headquartered in New York. This time, however, the deal was poorly received by financial markets, and Sovereign’s shares fell sharply. Analysts attributed the decline to the unhappiness of Relational Investors, Sovereign’s largest shareholder. Santander is allying itself with Sovereign’s management team in an effort to head off demands [by dissident shareholders] for any changes in its strategy and governance.
A High Price
Some analysts see clouds on the horizon because Santander has bought into a bank where the main shareholders are squabbling among themselves. But according to Torassa, “this purchase in the U.S. fits together perfectly with Santander’s strategy for the international diversification of risks and revenues despite the fact that the price it paid appears to be high [$27 per share] and the relationships among executives and other key shareholders are tense and extremely complex.”
Which of the two strategies do the professors prefer: Santander’s commitment to the U.S. banking market or BBVA’s focus on the Hispanic sector? “Although BBVA’s plan is less ‘glamorous’ than Santander’s, it is more consistent” in the sense that it “strategically complements the rest of BBVA’s Latin America franchise,” Torassa adds.
Sebastián agrees. “As the annual financial figures demonstrate, Latin America contributes [significant] profits, and its complementary character is a powerful generator of value for BBVA. Beyond treating [the acquisition of Sovereign] as a mere financial deal, Santander still has to demonstrate what its new franchise model will be. Sovereign can be a magnificent platform, but the concrete details have yet to be specified.”
For Guillén, the Santander/Sovereign deal represents “the first act in a three-act opera. In the second act, Santander will take control of Sovereign, or it will sell so it can finance the purchase of an even larger bank. In the third act, it will certainly take control of one of the largest banks in the U.S. I don’t exclude the possibility that within five years, Santander will own the Bank of America, for example. Everything depends on the circumstances.”