May 13th 2010
From The Economist print edition
Why it is hard to copy Santander
SANTANDER, the rich world’s fourth-biggest bank by market value, is a beacon of hope and a source of despair for other firms. Having started as a small regional bank, it pulled itself up by its bootstraps to become a big player in Latin America (as well as in Britain). Yet copying its strategy has become far harder now that most big emerging markets are in effect closed to large takeovers by foreign firms. Although the Spanish bank is dipping a toe into Asia, for example through a co-operation agreement with China Construction Bank, Santander’s boss, Mr Sáenz, is mildly concerned about the industry’s present frenzy to expand there. The region, he says, is “closed and expensive”.
Santander’s strategy is to build a deep retail presence with a large market share. A good example of how this works is Brazil. By assets Santander has a market share of 9% there, big enough to compete head-on with the big boys (see chart 9). The network banks are one level below this: HSBC has a 3% share and Citigroup 1%. The investment banks are another step down. Credit Suisse, which has a relatively big Brazilian operation, having bought a local firm, Garantia, in 1988, accounts for only 0.6% of the financial system’s assets. Santander’s business is heavily skewed towards lending to individuals and small businesses rather than to big firms.
The same is true of the other “gone native” banks. BBVA has a market share of about a quarter in Mexico. In eastern Europe Italian and Austrian banks have pursued a similar strategy. UniCredit, for example, is a mass-market bank in Poland, Bulgaria and Croatia, where it has shares of over 10% by assets. These banks argue that being big in particular countries is more profitable than being widely spread in the manner of the network banks. Ronit Ghose, an analyst at Citigroup, has benchmarked HSBC against local peers in its key regions and concluded that, outside Hong Kong, it typically has a worse cost-income ratio and return on assets, whereas Santander with its higher market shares in Latin America and Britain does better than the locals.
Establishing such positions of strength in depth takes time. Santander made its first round of acquisitions in Brazil in 1997 and its first game-changing one, of Banco Banespa from the Brazilian government, in 2000. Its build-up culminated in its purchase of ABN’s Brazilian unit in 2007. Nor is it for the faint-hearted. BBVA bought into Brazil in 1998, but by 2003 it had concluded that it was unable to achieve critical mass and sold out to Bradesco. These days even the willing and able simply cannot find much to buy, because most developing countries will sell big banks to foreigners only from positions of weakness.
In the late 1990s and early 2000s Brazil went through a period when it needed foreign capital, investors were still skittish and there was a political commitment to privatisation. In Mexico the government nationalised the banking system in the 1980s and refused to allow foreign firms to buy control when it privatised the system in the early 1990s. The opportunity for foreign banks came after the devastating peso crisis of 1994-95 which eventually caused the rules to be relaxed. That led to BBVA’s acquisition of Bancomer (2000-02), Santander’s of Serfin (2000), Citigroup’s of Banamex (2001) and HSBC’s of Bital (2002).
Something similar happened in South Korea. Citigroup and Standard Chartered bought their banks from private-equity funds that had picked up controlling stakes in 1999 and 2000 from the wreckage left by the Asian crisis. And in eastern Europe, where Austrian and Italian banks have cleaned up over the past decade, most of the original stakes were taken as cash-strapped governments auctioned banks after the fall of communism. Federico Ghizzoni, who runs UniCredit’s central and eastern European business, says the majority of its businesses were acquired through privatisations.
Slim pickings
Are there equivalent opportunities for Western banks today? Mike Smith, chief executive of Australia’s ANZ and an Asia veteran, says that in some countries in the region smaller family-controlled banks may be up for sale as capital requirements become more onerous. ANZ is also rumoured to be eyeing a bank in South Korea owned by a private-equity fund. But the biggest emerging markets, China, India and Russia, are state-dominated and no big banks are likely to come on the block.
Santander, finding much of the emerging world outside Latin America closed to it, has shifted its strategy. It has expanded through the crisis in Britain, buying bits and pieces (and bidding for some of the branches Royal Bank of Scotland is selling) to add to the base it acquired with Abbey in 2004, gradually building up market share—much as it did in Brazil. Mr Sáenz says the bank has “faith in a business model more than a geography”, adding that “it’s more likely that in the near future we will invest in more mature economies.”
That could include eastern Europe, which has changed from emerging-market darling to villain. Instead of the bullish stories three years ago, when the penetration of banking services was expected to rise to western European levels, there is now deep pessimism about the region’s adverse demographic profile and its lack of a saving culture. Poland is Santander’s kind of market, though: biggish and with distressed sellers. Allied Irish Bank, having been bailed out by its government, is auctioning off its operation there, which has a 5% market share.
Other western European firms active in eastern Europe suffered during the crisis and are scaling back, for example KBC and Dexia. The healthy banks are staying put and remain optimistic. Société Générale is reorganising its interests in Russia and will get a majority stake in what will become the fifth-biggest firm by loans. It says it is convinced of the long-term potential. UniCredit’s Mr Ghizzoni says the “process of convergence will continue”.
Mr Sáenz believes that when countries invite in big banks from overseas it “puts lots of pressure on the competition”, forcing it to raise its game and allowing economic development to move at a faster pace. Partly because of that, he thinks that in the longer term countries such as India and China might open up somewhat. “Do I think this will be the situation for the next 20 years? I believe something will happen to these economies that will make them change their mind.” He points to Mexico’s sudden opening up in the 1990s. “My experience is never say that it is closed for ever. Things can change a lot.”
Time is what we don’t have
Santander, finding much of the emerging world outside Latin America closed to it, has shifted its strategy. It has expanded through the crisis in Britain, buying bits and pieces (and bidding for some of the branches Royal Bank of Scotland is selling) to add to the base it acquired with Abbey in 2004, gradually building up market share—much as it did in Brazil. Mr Sáenz says the bank has “faith in a business model more than a geography”, adding that “it’s more likely that in the near future we will invest in more mature economies.”
That could include eastern Europe, which has changed from emerging-market darling to villain. Instead of the bullish stories three years ago, when the penetration of banking services was expected to rise to western European levels, there is now deep pessimism about the region’s adverse demographic profile and its lack of a saving culture. Poland is Santander’s kind of market, though: biggish and with distressed sellers. Allied Irish Bank, having been bailed out by its government, is auctioning off its operation there, which has a 5% market share.
Other western European firms active in eastern Europe suffered during the crisis and are scaling back, for example KBC and Dexia. The healthy banks are staying put and remain optimistic. Société Générale is reorganising its interests in Russia and will get a majority stake in what will become the fifth-biggest firm by loans. It says it is convinced of the long-term potential. UniCredit’s Mr Ghizzoni says the “process of convergence will continue”.
Mr Sáenz believes that when countries invite in big banks from overseas it “puts lots of pressure on the competition”, forcing it to raise its game and allowing economic development to move at a faster pace. Partly because of that, he thinks that in the longer term countries such as India and China might open up somewhat. “Do I think this will be the situation for the next 20 years? I believe something will happen to these economies that will make them change their mind.” He points to Mexico’s sudden opening up in the 1990s. “My experience is never say that it is closed for ever. Things can change a lot.”
Time is what we don’t have
But taking the long view is a luxury that less successful banks cannot afford. Waiting for India and China to fall to their knees is hardly a strategy. That leaves those banks with few choices. One is to build branches rather than buy a bank, which might work in some places. Standard Bank, its South African rival FirstRand and some of Nigeria’s healthy banks are expanding their networks across the rest of Africa, where there is little competition.
It might also work for banks with privileged access, for example in China. ANZ is building a bigger presence in Asia, having been ambivalent towards the region for years. Its boss, Mr Smith, explains that Australian businesses are now far more integrated with Asia and that this customer base gives ANZ an edge to expand its business abroad. Still, in most markets local bank bosses are pretty sceptical about Western firms building Rome branch by branch. “I don’t think they will be major players” is about the politest comment your correspondent heard.
It might also work for banks with privileged access, for example in China. ANZ is building a bigger presence in Asia, having been ambivalent towards the region for years. Its boss, Mr Smith, explains that Australian businesses are now far more integrated with Asia and that this customer base gives ANZ an edge to expand its business abroad. Still, in most markets local bank bosses are pretty sceptical about Western firms building Rome branch by branch. “I don’t think they will be major players” is about the politest comment your correspondent heard.
There is a traditional last resort, used, among others, by Japanese banks in California in the 1980s and more recently by desperadoes in eastern Europe. The formula is to set up a few branches, or pay astronomical prices to buy them, then use funding from your parent or from wholesale credit markets to lend through them. By some estimates half of foreign banks’ loans in central and eastern Europe came from such sources. But regulators are cracking down. The new Basel 3 rules will penalise banks with too much wholesale or cross-border borrowing, and with good reason. A recent IMF briefing contrasted the sharp slowdown in foreign-bank lending in emerging Europe with the much more stable picture in Latin America (see chart 10), where foreign banks typically have bigger branch networks. It concluded that “foreign-bank lending funded by domestic deposits and denominated in local currency is likely to be more resistant to external financial shocks.” The days of building up a big loan book without bothering about deposits or branches may be over. As Mr Ghizzoni puts it: “Some banks had an opportunistic approach. It’s a game that is at the end.”
So what are traditional banks in Europe and America to do if they want to expand abroad? They face stagnant home markets. They cannot replicate the presence of firms such as Citigroup or HSBC. They have no opportunity to buy dominant positions in attractive geographic markets, as Santander did, and no tradition of competing in sophisticated niches such as investment banking. Even the cheapskate strategy of buying a paper-thin presence is being closed off. Their only consolation is that emerging-market banks face the same dilemmas as they venture abroad.
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