Solidity and confidence: These are the key words that describe the Spanish banking sector. The global crisis that the financial system is undergoing does not appear to have had much negative impact on Spanish banks. At least, that’s the implication of the latest forecasts for acquisitions by such institutions as Banco Santander and BBVA.


On September 22, Santander held an extraordinary meeting of shareholders with the goal of approving a proposal to expand its capital so that it could obtain enough financing to purchase UK-based Alliance & Leicester. At that session, Emilio Botín, president of Santander, gave this message of confidence to his shareholders: “Given the difficult circumstances, nationally and internally, I want to tell you that Santander is well prepared to face this situation — better prepared than our competitors.” According to Botín, this strategy will enable the bank to reaffirm its business forecasts for 2008. “Despite the fact that financial turbulence has continued to grow in recent months, the Board of Directors maintains its hope that it can achieve total net profits of 10 billion euros in 2008.”


The following Monday, newspaper headlines trumpeted Santander’s purchase of another victim of the European financial crisis: Bradford & Bingley, the eighth-largest bank in the United Kingdom. With this move, Santander will acquire retail deposits, a network of offices and a workforce, all for a price of 624 million pounds (or 788 million euros).


For its part, on September 4 BBVA announced the successful integration of Texas State Bank into BBVA-owned Compass Bank. This is an important move because it constitutes still another step in the process of launching the BBVA Compass brand in the U.S. José María García Meyer, president of BBVA Compass and country manager of BBVA in the U.S., declared, “The launch of the BBVA Compass brand, and the successful integration of Texas State into the Compass operating systems and product platforms, represent major steps in our desire to create the leading provider of financial services in the Sunbelt region.” In November, with the integration of LNB (formerly, Laredo National Bank), BBVA will complete its integration plan for the U.S. This is the third phase in the complete BBVA plan. The goal is to merge the four U.S. banks owned by BBVA into a unified franchise before the end of 2008.


These events give rise to certain questions: Are Spanish banks in better condition than their counterparts in the U.S. and elsewhere in Europe? What are the strategies of these two great Spanish banks in the face of the crisis?


Mauro Guillen, director of Wharton’s Lauder Institute, is certain that Spanish banks are in a solid position, and that they are well capitalized and supervised by the Bank of Spain. “They are strong banks, and they are going to benefit from possible acquisitions at a time when the prices for bank assets are very low. Arrears are growing but they are still very low.” With respect to Santander, he affirms that it is “an especially solid bank with an exemplary geographical diversification and healthy profits.” He even calls the bank “potentially a big winner from the crisis.”


Manuel Romera, technical director for the financial sector at the IE Business School, believes that because Santander and BBVA realize that this market is very unstable, they are waiting until they can make acquisitions at a good price. “Both are more geographically diversified than the rest [of the sector], and this enables them to minimize their risks. Nevertheless, there are other Spanish banks and savings banks that depend too much on Spain, where the inability of consumers to repay their mortgages and finance their spending has made the real estate sector very risky.”


Recent reports that Santander was about to take over Alliance & Leicester have attracted a great deal of attention. According to Romera, the reason that Santander is better prepared than other banks to ride out the crisis is that it has more of its own resources in proportion to assets, weighted by risk, which means Santander is better capitalized. “The average Spanish bank has aBasel  Capital Adequacy  Ratio of about 12%, compared with the global average of below 10%. In other words, they’re handling their solvency obligations better, since they are less leveraged in their financing and have lower-risk loans,” Romera says.


Nevertheless, when conditions are this challenging, some people might think that this is not the right time for banks to continue making acquisitions. The key, however, is to identify the best markets for carrying out these investments and taking advantage of opportunities. According to Guillén, “Spanish banks can take advantage of this situation to continue with their international expansion. The global economy is suffering now but it will recover. If they take advantage of opportunities, they are going to position themselves as great international institutions.” Guillén does not even rule out the possibility that Spanish banks will make an important acquisition in the U.S. or in Asia.


Romera agrees. “Santander is a very well managed bank, with enough capital not only to acquire money, but also to maintain the solvency level of its good levels. I think that Santander is very well prepared since its risk policy has always been very sound, and it has dedicated itself to what it knows how to do, which is retail banking; that is, taking in and paying out funds to private individuals and companies. For example, Santander derives 70% of the funds that it loans out from its own customers. This provides Santander with protection from the great swings in the marketplace, and with a management team that is very efficient when it comes to buying and selling businesses.”


Forecasts for Share Prices


Guillén argues that as long as confidence is lacking in the markets, there will be downward pressure on financial valuations, but he stresses that this is a passing trend. For his part, Romera believes that there are “real bargains” in the marketplace. He does not distinguish them by geographical area or business sector but by sound management and sustainable results. “Banks should continue with their acquisitions because share prices in the market are dropping both for companies that are ‘good and solvent’ and for those that are ‘bad and barely solvent.’”


In times of crisis, more than ever, the key principle is to take a strategic approach. Romera argues that banks in Spain, the U.S. and Latin America should follow the same strategy: They should be very transparent about what happens since because they will pay a high price in the market if they don’t. When it comes to short and long-term movements in the share prices of financial institutions, Romera adds that he does not know what to expect. However, he believes that if the plan of the U.S. Treasury and the Federal Reserve Board is approved by Congress, share prices will rise, especially for those companies that have been punished without much justification.


Emerging Stronger after the Crisis


José Ignacio Galán Zazo, director of the Iberoamerican department for business management and corporate social responsibility at the University of Salamanca, says that Spanish banks are pursuing the right approach. Each institution is following its own goals and responding to its particular situation. “Santander Bank has shown on numerous occasions that it knows how to make acquisitions at the most opportune moment. Santander and BBVA are two of the world’s biggest banks” and their sound health can be seen fundamentally in the realm of commercial banking. “From the viewpoint of competitive advantage and real markets, which are what counts in the medium and long term, they are in an unbeatable situation, and this global financial crisis will enable them to come out stronger, and with much more room for taking action,” he says.


Galán’s views echo the statements made by Santander president Botín: “Without the slightest doubt, I think Santander is much better prepared than other banks to overcome this crisis.” Galán goes further, adding, “What’s more, I believe that it will emerge much stronger from the global economic and financial crisis. The crisis has enabled Santander to broaden its presence in the U.K. with enormous synergies and at a good price.” As for the keys to maintaining its position of strength in the banking sector, Galán says, “There are several reasons why Santander is in a favorable position compared with other banks: its geographical diversification, leadership, managerial talent, brand image, corporate image and so forth. All that can be summed up as ‘excellence in the management of the commercial banking business, with a high level of experience and an impeccable track record.’ In my opinion, it’s not just that they won’t be damaged by the crisis, but that over the medium and longer term they will actually benefit a great deal.”


Galán argues that banks should continue to make acquisitions. “It’s precisely during these troubling times that great buying opportunities emerge. It’s when the environment is difficult, and valuations drop as a result of economic chaos; when the market keeps going lower and there is panic selling. That’s when things turn out better for acquisitions. When conditions are extreme, markets destroy many valuations and markets which, because their fundamentals and real assets are sound, can generate great results in the future. This is an excellent opportunity for those banks that know how to acquire these sorts of assets and markets. They know how to combine these assets by using talent, experience and funding, and a carefully considered business model.” In his view, acquiring a bank in the U.S. could provide Santander with an unprecedented platform to expand its commercial network and apply its business model.


The Challenges Ahead


Galán outlines three challenges to Spanish banking: First, focusing on the commercial banking business; second, continuing along the path toward increasing efficiency, productivity and controlling risk; third, taking advantage of the opportunities presented by the crisis to obtain feasible synergies and geographical diversification. “Essentially, it’s all about establishing medium and long-term goals that extend beyond the crisis, with an end to converting current threats into medium and long-term opportunities for growth and increased profitability.”


He also offers his short and medium-term predictions for the future of medium-size Spanish banks.  “The average bank is more affected than large banks, essentially because of two factors: The absence of geographical diversification, and greater exposure to the construction and real estate sectors. Nevertheless, I believe that Spanish banks have generally managed themselves with strength, and banking in Spain is not contaminated the way banking is in the U.S. Spanish banks’ greatest problem stems from the growing rate of arrears that is a consequence of cyclical change and the collapse of the real estate sector in Spain.” Despite that, Galán is relatively optimistic. “I believe that [the U.S. Congress] will ultimately approve the ‘rescue plan’ for the U.S. financial system, and that the ECB [European Central Bank] will contribute in an urgent way further by softening the pressure from arrears and rebuilding some of the confidence in financial and real markets. As a result, medium-size Spanish banks, along with the European economy, will benefit a great deal and wind up being strengthened by this process.”