The Rise of Santander

The once-regional Spanish bank has shot to the front ranks of Europe's finance industry through traditional lending and savvy acquisitions

By Mark Scott

Emilio Botin, Chairman of Spanish banking group Banco Santander speaks at a conference in Madrid PIERRE-PHILIPPE MARCOU/AFP/Getty Images

As financial institutions worldwide struggle to stay afloat, Banco Santander (STD)—now the euro zone's largest bank by market value—is emerging as one of the few winners in the global economic crisis. With no exposure to toxic U.S. subprime assets, a diversified business spread across Europe and the Americas, and an estimated $68 billion in capital reserves, the bank, founded in the port of Santander on Spain's northern coast, is sailing past troubled rivals.

Santander's strength has been evident in recent months as it gobbled up distressed assets across Europe. When Britain's government nationalized beleaguered mortgage lender Bradford & Bingley (BusinessWeek.com, 9/29/08) on Sept. 29, the Spanish bank quickly agreed to pay $1.09 billion for its retail branches and—more important—for control of its $37.4 billion of customer deposits.

The move on Bradford & Bingley came only days after Santander sealed a $2.24 billion acquisition of British lender Alliance & Leicester. Combined with its $16.4 billion purchase of Britain's Abbey National in 2004, the two latest acquisitions will give Santander roughly 13% share of Britain's home lending market. Its run of buyouts may not be over, either: The bank has made a preliminary offer for Germany's Deutsche Postbank (DBPGN.DE), though it declines to comment on the potential deal.

Keeping Out of the Mire

Ironically, Santander owes its current success in part to strict limitations the Spanish central bank put on structured credit investments. Because it couldn't wade into securitized assets, Santander has been spared the worst effects of the subprime crisis. It focused instead on traditional retail banking, which now provides 85% of earnings. And it also diversified aggressively from its Spanish home base, focusing particularly on fast-growing Latin America. According to Credit Suisse (CS) estimates, Santander branch operations from Mexico to Brazil are expected to pull in a third of the bank's projected $14.6 billion in 2008 profits.

"We are in a great position compared with our competitors," Chairman Emilio Botín told shareholders on Sept. 22 at a meeting to approve the Alliance & Leicester deal. European bank stocks overall have fallen 38% so far this year, but Santander is down a less dreadful 29%.

Santander's newfound star status is a dramatic shift for a company that until the mid-1980s was a regional player in one of Europe's then least-developed economies. Much of the bank's current success can be traced to Botín, who began making acquisitions soon after taking the reins in 1986. A merger with Banco Central Hispano in 1999 made Santander the largest player in Spain, and the Abbey National acquisition leapfrogged it to the top ranks of European banks.

"Santander always has bought assets that complement its existing businesses, and management has done a good job at not overexposing the bank's balance sheet," says analyst Antonio Ramirez at stockbroker Keefe, Bruyette, & Woods (KBW).