The Rise of Santander

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Smelling Like a Rose

This cautious strategy helps explain why Santander has been the main beneficiary of the $110 billion acquisition and carve-up of Dutch financial giant ABN Amro (BusinessWeek.com, 10/5/07). The bank joined forces with Royal Bank of Scotland (RBS) and Fortis (FOR.BR) last year to buy ABN, but the other two consortium partners have struggled under their highly leveraged financial positions. On Sept. 29, the Dutch, Belgian, and Luxembourg authorities were forced to rescue Fortis (BusinessWeek.com, 9/29/08), and RBS remains under a cloud, with its share price down 59% since the start of this year.

In contrast, Santander came out of the ABN deal smelling like a rose. By picking up ABN's Brazilian subsidiary Banco Real for $17.2 billion, it doubled its presence in that fast-growing market. Analysts figure Santander's expanded Brazilian business could account for a third of net profits by 2010, compared with 9.5% now, helping solidify its position as Latin America's largest bank. And as developed economies limp through a recovery during the next two years, figures Credit Suisse analyst Santiago López Díaz in Madrid, Brazil could constitute half of Santander's earnings growth.

From the beginning, Botín played the ABN deal differently. Typical of the savvy moves that have characterized his leadership, he quickly sold off ABN Italian subsidiary Banca Antonveneta to local rival Banca Monte dei Paschi di Siena (BMPS.MI) for $12.6 billion in November 2007. That let him pay for the Brazilian Banco Real without racking up too much debt or tapping shareholders for extra funds just as the credit crisis was starting to give investors the jitters.

Botín's diversification into emerging markets has been tightly coupled with a continued reliance on good old retail banking. Unlike other European firms such as Switzerland's UBS (UBS) that aggressively expanded their use of the capital markets, Santander still relies on deposits to cover almost two-thirds of its loan book. The bank's 6.3% core capital ratio is in line with the European bank average, but its rapid expansion outside of Spain holds out the promise of significant cost synergies. According to estimates, Santander could save $334 million in Britain alone by reducing overlap among its newly acquired businesses.

Not Completely Trouble-Free

After Morgan Stanley (MS) and Goldman Sachs (GS) became the last of the pure-play investment banks to give up this now-risky business model (BusinessWeek.com, 9/22/08), market-watchers figure other institutions now could try to copy Santander's retail-banking approach.

"In light of what's happened, Santander's somewhat conservative business model almost seems inspired," one London-based banking analyst said.

Of course, Santander hasn't completely dodged the problems affecting global finance. A decline in British and Spanish real estate (BusinessWeek.com, 7/21/08) has left the company particularly exposed. Three-quarters of its loan book is tied up in those two markets, and defaults as a proportion of total loans almost doubled in the first half of 2008 vs. the same period in 2007, to 1.3%. "Santander is going to suffer somewhat from the indigestion caused by these housing markets," says KBW's Ramirez.

But even if a correction is on its way, analysts don't expect Santander to face the same problems that have crippled other European and U.S. institutions. Thanks to tradition—and still-growing emerging markets—it's set to reap rewards just as other firms are trying to keep their heads above water.

Scott is a reporter in BusinessWeek's London bureau .