58 Business The EconomistFebruary 24th 2018
T
AKING a business onto the global stage is hard. Doing it with
banks can be suicidal owing to their complexity and leverage.
For over 100 years an assortment of adventurers and visionaries
have almost always tried one of two approaches. Either they
spread firms thinly over scores of countries and focus on servic-
ing big companies and facilitating trade. This is the way of Citi-
group and HSBC, and the path that China’s big lenders are racing
down. Or they focus on investment banking from hubs; think of
JPMorgan Chase or Deutsche Bank in New York, Hong Kong and
London. Both blueprints have often resulted in buckets of tears.
In the 1990s a “third way” emerged from provincial Spain; cre-
ating a global retail bank with a deep presence in many countries,
allowing true economies of scale. The pioneer was Santander, a
middle-weight bank from the Bay of Biscay. Today it is the king of
the euro zone: the bloc’s largest lender by market value, with 133m
clients, mainly in Brazil, Britain, Mexico and Spain. Its loftyposi-
tion in Europe’s league table demonstrates that itsapproach has,
on balance, worked.
Santander is run by Ana Botín, an optimistic character who
took over from her father, Emilio, on his death in 2014 (the Botín
family no longer has a significant stake in the bank but its reputa-
tion helped her win the top job). He had used guile and charm to
expand by means of acquisitions worth $80bn in total, first in
Spain, then across Latin America and in Britain, where it bought
Abbey in 2004. As the financial crisis struck in 2007 Santander
seemed well-positioned to weather it. It did not run a big invest-
ment bank and had just made an opportunisticacquisition of
ABN AMRO’s arm in Brazil, giving it heft there for the first time.
But the past decade has turned into the banking equivalent for
Santander of the Japanese game show “Endurance”, in which
contestants face an incredible sequence of tortures. Spain’s prop-
erty crisiscreated a mountain of bad loans which peaked only in- Brazil’s economy shrank in 2015 and 2016, and, although it
has stabilised, the country faces a rumbling political crisis. In 2016
Britain voted for Brexit and its currency plunged. Now Mexico
faces an uncertain future with the renegotiation ofNAFTA. In to-
tal these four economies account for 79% of Santander’s profits.
The pessimistic way of thinking about this is to look at the bill.
Since 2008 Santander has recorded a cumulative $139bn of bad-
debt charges, more than any bank except Citi and Bank of Ameri-
ca (which were bailed out) and double the sum atICBC, the big-
gest bank in China, the economy with the most dud loans. On top
of that, slumping currencies have wiped out a fifth ofprofits.
A more charitable view is that despite all this Santander never
made a quarterly loss. Because it mainly lendsto individuals and
small firms, often in countries with high real interest rates, it char-
ges borrowers more. Its loan book has yielded an average 8% in
the past decade, compared with 6% for 15 big global peers. It is run
efficiently and has not faced huge fines or sudden trading losses.
As a result its cumulative operating profits (before the bad-debt
charges) were $261bn over the past decade: another staggering
sum, higher than those of any bank other than JPMorgan Chase
and Wells Fargo, America’s two mightiest. Gigantic operating pro-
fits have allowed the bank to absorb massive losses.
Survival is a low bar, though. Has Santander rewarded its
shareholders? Its shares have outperformed the European indus-
try, but so what? Its return on equity (ROE) is a soggy 7%, reflecting
$32bn of goodwill from all the acquisitions. It ishardly a superb
performance. Still, the bank’s shares trade in line with its book
value, suggesting returns will improve. And in a parallel universe,
had Santander stayed at home in Spain, it would have done far
worse given that its profits there sank by 77% from peak to trough.
For Ms Botín, this is mostly water under the bridge. What mat-
ters now is demonstrating it still makes sense to run a geographi-
cal conglomerate. Here the signs are better. Excluding goodwill,
return on tangible equity (ROTE) is already a passable 10%. And
Santander does seem to outperform its local peers. Schumpeter
has constructed a “synthetic twin” of the bank, based on the com-
bined performance of the local banks in its markets, weighted by
Santander’s geographic mix. ItsROTEis an inferior 8.5%.
Since taking charge Ms Botín has built up capital, brought bad
debts under control in Brazil and done several midsized deals to
boost the bank’s position in various markets—in June it bought
Popular, a troubled midsized Iberian lender. But her big idea has
been to focus more on organic growth. Only13% of the bank’s cus-
tomers use it as their main bank; by lifting this figure Santander
would earn more fees. In Brazil and Mexico roughly 60% of the
population still do not have bank accounts, an opportunity.
Technology is key on both fronts. In Spain Santander is ramp-
ing up a digital sister bank called Openbank, with mobile pro-
ducts and its back-office in the cloud. In Brazil and Mexico it has
launched Superdigital, a mobile-payments service for the un-
banked. This drive to create a large, loyal, cross-border digital cus-
tomer base mirrors what big emerging-market fintech compa-
nies, such as Ant Financial in Asia, are doing. The prize is higher
market share and lower costs. If technology can be used to im-
prove underwriting, it could lower bad debts, too.133m reasons to do better
It is unlikely that another global mega-bank will be built using
Santander’s “third way”. Most countries have got nervous about
foreigners buying their big lenders. Yet Santander’s unique legacy
means it remains one of banking’s most interesting experiments.
It straddles the rich world and the emerging world, where many
digital innovations happen. It has no big investment bank to dis-
tract it. And it has the most customers of any bankoutside China
and India (Citi is next, with 110m). Could Santander become the
first global bank to earn a high ROEbecause it actually has better
products? The industryhas been waiting forover 100 years. 7The Santander experiment
Europe’s banking champion took a unique approach to globalisation. Has it been vindicated?Schumpeter