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The Super Banks of Spain


Since giant German insurer Allianz unveiled its planned purchase of Dresdner Bank in early April, Europe's bourses have been swept with one rumor after another about which big finance deal would come next. A tie-up between French insurer Axa (AXA) and mighty Deutsche Bank? An aggressive Continental play by one of the well-heeled British banks? Nobody knows for sure. But the feeling is mounting that Europe's financial-services industry will see more moves as the savviest banks, insurers, and brokerages position themselves for the next round of consolidation.

Finance cognoscenti, though, aren't just looking to the traditional money centers for some action. Instead, they're also looking south, to Spain, where two banks have joined the ranks of Europe's best. For 12 years, Banco Bilbao Vizcaya Argentaria (BBV) and Banco Santander Central Hispano (STD) have been locked in a fierce rivalry. Running neck and neck, they've built financial muscle and market share in Spain and in Latin America. Today, having outstripped many Continental rivals, they've set their sights on Europe at large.

Indeed, BBVA was rumored to be on the prowl in Germany at the time of the Allianz/Dresdner deal. Its chief executive, Pedro Luis Uriarte, denies the buzz, though he admits he would be interested in Dresdner's investment bank if Allianz spins it off. Just making the deal-watchers' A-list shows how far Spain's power banks have come. The products of a decade-long series of mergers among Spanish banks, they have unmatched experience handling acquisitions. Both Uriarte and BSCH CEO Angel Corcostegui are primed to launch the first major cross-border bank mergers on the Continent. "They will absolutely be among the first. They've already done their homework," says Jes?s Mart?nez, bank analyst at Standard & Poor's in Madrid. "We can do something at a moment's notice," boasts BSCH Chairman Emilio Bot?n.

It's the unflinching competition between the two banks that has honed them into such forces to be reckoned with. When one makes a move, the other parries. Last August, Uriarte and his co-chairman, Emilio Ybarra, celebrated the purchase of Mexico's Grupo Financiero Bancomer, which made BBVA the No. 1 bank in Latin America in terms of assets. Three months later, Bot?n won a controlling minority stake in Banco do Estado de S?o Paulo (Banespa), the seventh-largest bank in Brazil. It cost an astronomical $3.55 billion, but it put BSCH back on top.

A STRUGGLE. At home and in Latin America, the two banks vie for everything from consumer deposits and pension-fund management to corporate lending and wholesale banking. Together, they account for more than 30% of loans and 40% of the mutual-fund market in Spain's private banking sector. BSCH's assets exceed $320 billion, while BBVA's total $280 billion. They each boast market capitalizations in excess of $42 billion, putting them just behind Deutsche Bank. They track each other in profits, too, each having earned about $3.5 billion before taxes last year.

Making European acquisitions, however, will be a struggle. To date, the euro zone has been a graveyard for big cross-border bank mergers. Most deals die aborning, as regulators and central banks keep foreign predators at bay. Even local deals have collapsed over jealousies and unresolved turf battles. Allianz tried and failed to marry Dresdner off twice before opting to buy it.

But the dam may be about to break. With a bear market settling in and share valuations down across Europe, deals will be far cheaper for the Spanish to pull off. A key psychological barrier is coming down, too: Euro notes and coins are set to be issued next January. This will be tangible evidence that Europe really is a single market and cross-border mergers a logical next step.

No wonder the Spanish banks as well as such financial institutions as Deutsche Bank, Britain's Lloyds-TSB, and the Netherlands' ING Group are now scouring Europe for merger partners or takeover targets.

Uriarte already pounced once and missed. In November, 1999, BBVA made a deal to merge with Milan-based Unicredito Italiano, Italy's most profitable bank, but Italian bank authorities killed it. Unbowed, Uriarte vows he'll move again as soon as the political climate changes. "It's a question of timing," he says. "We have the wedding ring in our hands. We want to build the new financial markets of Europe."

Senior executives at both banks are mum on potential partners. But bank analysts, competitors, and consultants believe BBVA will soon clinch a deal for a medium-size bank in Southern Europe. BSCH might well go for a full-scale merger with one of its strategic partners, such as Italy's SanPaolo IMI, with which it shares a consumer finance business, or France's Soci?t? G?n?rale, with which it pools some asset management operations. "The most logical markets are France or Italy. If the takeover target is too big, the process will be too bloody," says David Allen, professor of management strategy at the Madrid business school Instituto de Empresas.

LATIN BEHEMOTH. BSCH got a taste of that in early 2000. It had to battle with the Portugu?se government for major stakes in the four banks held by Portugal's Champalimaud group, the country's third-largest financial group. In the end, the bank settled for a compromise which gave it control only over Banco Totta & A?ores and Credito Predial Portugu?s, though it still became the fourth-largest financial group in Portugal, with a 10% market share.

It's no fluke that two of Europe's most competitive banks are from Spain, long considered the laggard of Western Europe. The backwardness of Spain's industry was an important factor. With few major industrial companies to compete for talent, the best managers gravitated to the service sector, especially banking, where they engineered a brutal consolidation process, the likes of which the more protected French and German banks have yet to experience.

Bot?n, whose great-grandfather founded Banco Santander in 1857, shook up Spain's clubby banking clique in 1989, when he offered its first interest-bearing checking accounts, unleashing ferocious competition. An astute strategist with a high tolerance for risk, Bot?n soon built Santander into Spain's No. 1 bank in assets. But Bot?n's rival Ybarra at BBVA was never more than a half-step behind. In 1986, he helped lead the merger of two tough Basque rivals, Banco Bilbao and Banco de Vizcaya, momentarily stealing the title of Spain's biggest bank. In November, 1999, BBVA's Uriarte bulked the bank up again by buying Argentaria from the state.

With European Monetary Union looming, being No. 1 and 2 in Spain clearly wouldn't suffice. Bank executives across the budding euro zone wanted pan-European heft. The Spanish banks were as eager as any to get bigger, but they decided to bypass Europe's entrenched markets--for the moment. Instead, they went where they held a rare advantage over U.S. and European rivals: Spain's and Portugal's former colonies in Latin America, which began privatizing and opening their ailing banking systems to foreigners in the mid-1980s. Santander had led the charge as early as 1983.

Some $15 billion later, BSCH owns 10% of the Latin American banking market, with banks in 12 countries from Mexico to Argentina. BBVA, which started a decade later, has spent $8.2 billion for just under 10% of the Latin market and is determined to spring ahead of its rival again by buying a large bank in Brazil. It already leads in Latin American pension-fund management, with a 28.5% market share. The Spanish banks "kicked butt in Latin America against Citibank, HSBC, and all the rest," says Allen, "and not just because they speak Spanish. They were more aggressive. They are fantastic retail bankers."

MERCHANT PRINCE. The financial markets have rewarded both banks' Latin growth strategies with soaring valuations. And they have been hurt less than other European institutions in the current downturn. As of April 9, BBVA's shares were down a mere 3.7% for the year, while BSCH's stock was down 7.5% in the wake of the expensive Banespa takeover. Their executives are eager for more deals. "If there's an opportunity, we'll take it," says BSCH's Bot?n. "We are willing to push in Europe but not just to be bigger. It has to make sense for shareholders."

If there is a prince of Spanish banking, it is Emilio Bot?n. Banco Santander has been run for four generations by his family members, and Bot?n, now 66, is still the largest shareholder with a direct 5% stake. Bot?n's top knight is 49-year-old Corcostegui, who engineered a sharp turnaround at Banco Central Hispano before merging it with Santander. Corcostegui, with his fluent English and Wharton PhD in finance, knows the enemy well. The former Banco de Vizcaya executive helped mastermind the merger with Banco Bilbao in 1988, then spent four years at Banco Bilbao Vizcaya, the forerunner to BBVA.

Why should these Spanish bankers be the first to leap Europe's borders? Both banks boast a wealth of experience in forcing disparate corporate cultures together. Banco Bilbao learned the hard way in its merger with Banco de Vizcaya. To avoid conflict, top management appointed two executives for every position--one from each bank. Disastrous trench warfare ensued as big egos vied for control and top talent. In 1994, the board took a new tack, installing the charismatic Uriarte as CEO with the mandate to clean up the mess. He quickly streamlined the structure and launched an ambitious three-year plan to improve the bank's performance, meeting his goal of raising return on equity to more than 18% from 12.1% in 1,000 days.

Under Uriarte's six-year stewardship, profits have risen more than fivefold, and the bank's market capitalization has grown from $4.7 billion to $43.7 billion. "He took a bank without any direction and gave it leadership," says Inigo Lecubarri, bank analyst at Salomon Smith Barney in London. "He's probably one of the best CEOs in Europe." BBVA put the lessons of the early 1990s to good use when it integrated Argentaria ahead of schedule in 12 months.

BSCH and BBVA are given credit for managing their empires well. In their Latin American operations, they have introduced highly effective risk-management systems that have protected them from the region's periodic financial upheavals. State-of-the-art technology gives top management in Madrid up-to-the-minute information across a continent of holdings. Teams of highly trained Spanish analysts routinely scrutinize loans originating in Latin America. BSCH has 60 Spaniards in charge of risk who meet regularly in Miami. "We lose business sometimes because our parameters are so strict," says Bot?n. But the approach pays off in the long run. Last year, bad debts at BSCH's operation in recession-bound Argentina were just 7%--less than half that of the financial sector as a whole. Of those, less than half had to be written off. Globally, loan-loss provisions for both BBVA and BSCH were less than 0.8% last year.

There's no guarantee that the Spaniards can do in Europe what they've done in Latin America. For starters, the European market is more mature, and it will be harder to bring in new clients or wrest savings from an acquisition there. "Until now, 50% of their success in Latin America has been cost-cutting," says Jos? Luis de Mora, bank analyst at Merrill Lynch Global Securities in London.

Despite their overall success, the banks' expansion record has blemishes. Santander occasionally moves too fast. In the 1980s, it opened East Asian offices only to close them for lack of business. Soci?t? G?n?rale now represents the bank there.

BSCH is often so anxious to steal a march over its rival that it overpays for acquisitions. Last November, the bank agreed to pay $3.55 billion for 30% of Banespa--more than three times as much as the next highest bidder. True, Banespa is an attractive bank with a strong franchise in Latin America's largest economy, and Corcostegui says the bank will be generating profits of $750 million a year in three years and that he would pay the same price again. Moreover, in a move that brings down the overall price-to-book-value ratio, BSCH has bid for the remaining 67%, putting the total price at $4.87 billion. Still, shareholders, investment bankers, and analysts say he could have gotten it cheaper.

BBVA, by contrast, is often too slow. Its traditional approach has been to take a controlling minority stake, which means it makes all the effort to turn the new subsidiary around but does not get all the rewards. That's one reason why it has been slower than BSCH to boost its earnings from Latin America. BBVA earned $793 million before taxes from Latin America last year versus BSCH's $1.52 billion.

Both banks also made huge investments in Internet banking at the peak of Net euphoria a year ago. BSCH paid $550 million for 75% of Argentine financial portal Patagon and then upped it to 97.6% for an estimated $200 million. Now, some analysts value it at barely $75 million. BSCH insists Patagon will be profitable by 2002. It also distributed 100,000 free Wireless Access Protocol cellular phones to customers to dominate the market in cell-phone-based financial services--only to see the WAP technology for wireless Net phones flounder.

STRATEGIC PRIORITIES. BBVA launched its own Internet bank called Uno-E, and took a 34% stake in Dublin-based First-E for $367 million, saying it would merge the two and create the world's first global Internet bank. It also announced an ambitious e-commerce link with Spain's Telef?nica. The Telef?nica deal has since stalled, while Uno-E has hardly set the world on fire.

Top managers insist the investments are strategic priorities and will pay off. "Technology is one of the big bets of the company," says BBVA Co-chairman Francisco "Paco" Gonz?lez. "Technology will transform the bank entirely. We must provide a broader set of services. We will not cut our technology spending." BSCH likewise is pushing forward with a joint venture with AOL Europe to launch AOL-branded financial services in Spain through a mass-market portal linked to a Web device.

But overexuberant investments haven't stopped BSCH and BBVA from becoming two of the most powerful banks in Europe. Both will be well-positioned once the cross-border acquisition binge begins in earnest, probably in the next 12 months or so. The Spaniards have the financial heft to join the fray. Though both banks' capital reserves have been squeezed by their recent acquisition binge, they are in a strong position to raise cash. Besides, they each have around $11 billion tied up in industrial holdings that could be sold off to raise capital for future acquisitions.

BBVA's willingness to countenance mergers as well as acquisitions means it is particularly well placed to tie the knot with a large European player. BBVA holds a 3.75% stake in France's Cr?dit Lyonnais and a 10% stake in Italy's Banca Nationale di Lavoro (BNL), but the Spanish bank's Europe scouts may be looking for something even more appealing. "We're looking for good banks with good perspectives," says Uriarte. Some say the alliance with ex-fianc? Unicredito could be rekindled, especially since Chief Executive Alessandro Profumo openly admires his Spanish counterpart.

A megamerger with one of Europe's biggest banks isn't out of the question. HSBC (HBC), ING, and Lloyds-TSB (LLDTY) are among those often named as possible partners. Though issues of control would make a merger more difficult than an acquisition, the combined company would cast a shadow over world finance--and the Spanish may be ready to give up total control to be part of a global entity.

BSCH could be the first to move. There are rumors that it has contemplated swapping its Banesto unit for a bank in another euro-zone country.

After a decade of preparation, the dons of BBVA and BSCH are eager to redraw Europe's financial map. Bankers of Europe, be warned. The Spanish are in a mood to conquer. By Gail Edmondson and David Fairlamb in Madrid, with Andy Robinson in Bilbao, Geri Smith in Mexico City, and Jonathan Wheatley in S?o Paulo


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