Spain’s Banking Armada
King Philip II of Spain lived in the sixteenth century, an era when Spanish hegemony in Europe was founded on the maritime and economic power it achieved after its discovery of America in 1492. For decades, the Spanish Armada – its fleet of ships – controlled the seas, from horizon to horizon. Almost five centuries after that spectacular political expansion, Spain’s banking sector, with its flagships Banco Santander and BBVA, is experiencing a new age of glory. Spain’s two largest banks have conquered Latin America and U.S. interest rates are in a clear upward cycle. So the two banks have launched a campaign to conquer the European market, and return to the historic era when Charles V, father of Philip II, made this historic quote: “The sun never sets on my empire.”
Already, Spain’s Banco Santander Central Hispano and BBVA have become two of the largest banks in Europe. Now larger than German, French and Dutch institutions, the Spanish banks are competing with the powerful institutions of Britain, much like the fleets of Spanish galleons that competed against the English in the sixteenth century. Sailing from the same port, Santander and BBVA have developed expansion strategies that are different in some respects, yet fundamentally similar. “At the moment, they look like different roads, but sooner or later they will find themselves in the same markets,” says Mauro Guillén, a professor at the Wharton School. In his view, expansion plans at both banks are fed by similar concerns. “The local market is saturated; they need to grow, and they are searching for ways to provide returns for their shareholders.”
The new Santander is the result of years of organic growth, as well as integration of the group, and mergers with other banks. These other institutions include, above all, Spain’s Banesto (1994) and Central Hispano (1999); Brazil’s Banespa (2002) and Britain’s Abbey National (2004). For its part, BBVA was formed by the 1988 merger of two banks – Bilbao and Vizcaya. However, BBVA’s biggest leaps forward occurred when it merged with Argentaria (a formerly state-owned bank) in 2002; with Mexico’s Bancomer (in 2001), and with BNL (in 2005). Thus, these two large Spanish institutions were formed in two parallel processes of concentration.
“First they [both] go to Latin America, but BBVA concentrates on Mexico, Colombia and Argentina, while Santander focuses on Chile, Argentina and Brazil, “ adds Guillén. “In recent years, they have taken separate paths: Santander does it through the U.K. and Eastern Europe, while BBVA buys more in Mexico and now in Italy. Both banks also want to have a presence in the United States. However, BBVA does that with acquisitions on its base of Bancomer in Mexico, and for the Hispanic market. Meanwhile, Santander carries that out through an alliance with Bank of America.”
The strategy taken by the two banks follows the pattern in other business sectors. Spain’s largest companies, which launched a massive attack on Latin America a decade ago, are now writing the second page in that story, undertaking massive expansion in Europe. Among the Spanish companies showing the greatest appetite for making acquisitions in Europe: Ferrovial y Acciona, the construction firm; Telefónica, the telecom company; Metrovaseca, the real estate firm; Endesa, the electric utility; Repsol YPF, in the oil sector; and NH, the hotel chain. Nevertheless, the banking sector is playing a special, leading role. In part, this is because, as Standard & Poor’s noted, “the Spanish banking system is among the healthiest [banking systems] in Europe.”
The Dream of Spanish Banking
With its recent takeover of Abbey National, the sixth-largest bank in the U.K., Santander became the largest bank in the euro zone, with a market capitalization of more than €57 billion. Only Britain’s HSBC, and its Royal Bank of Scotland (Santander’s ally during its three most recent periods of expansion) exceed Santander in size in Europe and in Britain. Following that, BBVA has responded to its rival by launching the acquisition – still underway – of Italy’s Banca Nazionale del Lavoro (BNL). BBVA’s offer for BNL is worth more than $7 billion. When the deal is finalized, BBVA will be the second-largest bank in the euro zone; it is currently ranked third. BBVA will have a total market value of about €50 billion. BNP Paris, with a market capitalization of €47.624 billion, is currently the only European institution capable of competing, one-on-one, with the all-powerful Spanish fleet. However, after taking over European banks, Spain’s banks now prefer to compete against the British, as well as outside Europe.
“Within one decade, the two banks will be among the five largest in the world,” says Guillén. “Twenty years ago, that would have seemed like a dream.” Another interesting topic is the way the two banks have taken routes that are similar to their corporate colors: the red of Santander and the blue of BBVA. “Santander has been more aggressive in its style, but both have strategies that get results,” says Guillén. “They make money, and they are among the ten largest banks in the world. If the deal in Italy works out, BBVA will be one of the twenty largest banks in the world.”
From America to the Battle for Europe
Christopher Columbus went into the history books as the man who discovered America. His ships arrived in the New World in 1492, to the cry of “Land in sight!” Five hundred years later, when that discovery was commemorated in 1992, Spain’s ‘small’ banks took their first steps, once again leaping across the Atlantic. After more than ten years in Latin America, which of the two banks has done a better job? Guillén believes Santander is slightly ahead of BBVA. “The big problem for BBVA is that it has no presence in Brazil, the country that represents 35% of the GDP (Gross Domestic Product) of the [entire] region,” notes Guillén.
More than a decade ago, the institutions that provided the foundation for today’s two largest Spanish banks – Santander Central Hispano and BBVA – undertook the crusade becoming stronger in Latin America, the natural market for Spanish companies. Today, Santander and BBVA still have their two largest overseas commitments in Latin America. They are, respectively, Santander’s Banespa in Brazil, and BBVA’s Bancomer in Mexico. “They are following two distinct roads,” says Guillén. “In Europe, there is more to gain, because they are better capitalized, and are more dynamic than the great majority of their competitors. In addition, they have all their cumulative experienced derived from Latin America.”
Turning Toward Europe
The takeovers of Abbey and BNL mean that these two giant banks, forged in the challenging markets of Latin America, are now turning toward Europe. Some experts believe that both banks have sped up their acquisition plans in Europe because of the interest-rate cycle in the U.S., which serves as the key indicator for debt throughout the Western Hemisphere. Beginning in June 2004, the United States has raised its federal funds rate from 1% to about 2.75%. Everyone remembers the crisis that shook emerging nations after rates were abruptly raised in 1994. Both Santander and BBVA responded by making acquisitions in Europe, so they could reduce their relative exposure to Latin America.
According to Standard & Poor’s, in the middle of 2004, 23% of the assets of both banks were in the [Latin American] region, which contributed 35% of the profits of the BBVA group, and 46% of Santander’s profits. Over the past two years, their subsidiaries in the region have enjoyed strong growth.
By purchasing Abbey and BNL, the two Spanish banks add some security to their investment portfolios. And, to some extent, they recover their European identities. According to some estimates, BBVA and Santander will gain extra exposure in the European market of between 10% and 15%. Which of the two deals will provide better results for the company that makes the acquisition? “Both will bring excellent results,” concludes Guillén. “It is the same approach as always: Buy a bank that has problems; clean it up; reorganize it; and start to grow.”
Obstacles in the Future
For both Santander and BBVA, Spain will continue to be the base camp for future expansion. Many analysts believe that both banks are too exposed in Latin America, and they believe the will proceed with discreet efforts to pursue further acquisitions. Both banks seem to be on the current list of institutions that may be making further purchases. Other banks on that list include ABN Amro, HSBC, and Royal Bank of Scotland. Financial markets are starting to take bets on which cross-border banking marriages are most likely to take place in Europe.
The variations are almost unlimited. And what are the obstacles? They include differences in taxation, language differences, and different schemes for protecting consumers. Pablo Botella, an analyst at the AT Kearney consulting group, takes a less dramatic view of the differences in taxation. Botella recently told Expansión, the daily business newspaper, “This is something Spanish banks have already had to confront in Latin America, where they are also different [tax] systems.” In a sense, fiscal differences can provide an incentive by permitting a sort of arbitrage. An institution that operates in several countries can tilt its activities, costs and revenues toward one of those countries, so it can take advantage of the most favorable taxation.