Has Banco Santander had a good crisis? That’s perhaps going a bit too far given the uncertainties that remain about the impact of Russia’s invasion of Ukraine on the financial sector.
But when Euromoney catches up with Santander executive chairman Ana Botín in London in mid March, she’s clearly feeling relatively less troubled about the situation than some other European banking leaders.
Although Spanish banking is highly sensitive to interest-rate movements, Spain is among the European economies least dependent on Russian energy and the furthest away from Ukraine.
Santander owns a top-three bank in Poland, although that only accounts for 3% of its total loans outstanding. Having rowed back in the early 2000s on a tentative post-Soviet entry, the bank has almost nothing at the eastern end of Europe.
“Our direct exposure [to Ukraine and Russia] is minimal, and given our geographical footprint, with 60% of profits coming from the Americas, the second-round effects will be less than our peers,” Botín tells Euromoney.
Caveat
There is obviously a caveat here. Europe is still Santander’s home market and, because of its maturity, the region accounts for 60% of its customer loans and 66% of customer funds. The Ukraine war is a European conflict and Europe is the worst-hit continent because of its energy dependence on Russia and business uncertainty about the spill-over effects.
Higher inflation could be particularly painful for consumer finance businesses in Europe. Germany – the big economy most dependent on Russian gas – is vital to Santander’s Digital Consumer Bank, which has a loan book of €117 billion.
Nevertheless, to the extent that Ukraine remains a regional crisis, Santander seems better placed than many of its peers in Europe, especially compared with two years ago.
Global diversification counts for little in a global pandemic. Covid-19 hit all Santander’s main markets exceptionally hard, undermining its core pitch to investors, and its long-held justification for a relatively low capital ratio.
We will look at Banamex, but the conditions would need to be right
Now, by contrast, Latin America and, to a lesser extent, the UK are providing a bulwark against a tougher eurozone environment.
Latin America is geographically distant from Russia and Brazil is one of Santander’s biggest profit earners. Ukraine-fuelled risk aversion isn’t good news for emerging markets as it has led to a stronger dollar, yet the boost to commodity prices from the war somewhat offsets that effect.
Note that the Brazilian real has appreciated against the euro, which is the currency Santander uses to book group profits.
Contrast this with BNP Paribas, which competes most closely with Santander for international investors’ attention as a eurozone bank. The French lender came out of Covid better than Santander: it had more exposure to the post-pandemic capital markets boom and less exposure to southern European small and medium-sized enterprises.
But in this crisis, BNPP’s big corporate and investment bank means it has much more exposure to Russia than Santander, even if not as much as other big French and Italian banks. Plus, BNPP owns one of Ukraine’s biggest banks.
On March 22, both BNPP and Crédit Agricole announced that they will exit all their business operations in Russia.
Meanwhile, Santander’s lack of exposure to Russia means that it is relatively well-place placed at a time when it is also being presented with a golden opportunity in Mexico.
Conditions
When Citi announced in January that it was launching a sale of Banamex, one of Mexico’s biggest banks, it put one of the world’s most-attractive, internationally held, retail-banking franchises in play.
Santander, alongside Scotiabank and possibly HSBC, is one of only two or three international banks that could feasibly buy it because it already has a sizeable Mexican business – although not as big as BBVA, which is already Mexico's biggest bank and so is probably barred for competition reasons.
“We will look at Banamex, but the conditions would need to be right,” says Botín.
Those conditions will be threefold: a good price; that it is welcomed by Mexico’s government and competition authority; and that it can pay in cash without issuing more shares or going below a 12% common equity tier-1 (CET1) ratio.
Santander, Botín insists, is not desperate to buy Banamex. But this is not an opportunity it can easily let pass either. Mexico offers a rare combination of emerging market-style high returns in banking and more stability than most of the other emerging markets where international banks have big retail businesses.
It certainly looks safer than Turkey, where tensions at the central bank have fuelled rampant inflation, but where BBVA still ploughed billions of euros of new capital into its local bank, Garanti, late last year.
With $55 billion of assets and $4 billion in equity, Banamex could be Santander’s most transformational M&A deal since Botín took over from her father Emilio in 2014, at least in terms profitability.
It is the sort of opening that struggling European peers such as Societe Generale and UniCredit can only dream of, especially now their main emerging-market play, Russia, has become such a liability.
Yet Banamex wouldn’t be a one-way bet for Santander. Big M&A deals always come with big risks, whether it’s in the balance sheets, operations or culture.
We have a good and growing business in Mexico and don’t need to buy Banamex
Given the situation in Europe, the attraction of M&A in the Americas is clear. Acquisition in Europe seems a much more distant prospect for Santander than buying Banamex in Mexico.
Still, reallocating yet more group capital away from the home continent might not go down well with key stakeholders. All three of its most important acquisitions last year – fixed-income broker dealer Amherst Pierpont and the buyouts of minorities of Santander Mexico and Santander Consumer USA – were in North America.
Consider too that Santander’s 2017 Banco Popular acquisition, although initially lauded, gave it a much bigger Spanish SME business just before Covid, making its last big M&A deal look less fortuitous with hindsight.
In Mexico, the banking sector’s relatively high profitability means acquisitions can revolve less around cost synergies than in Europe. Even so, Botín knows that management would have to spend years focusing on integrating the new bank rather than just growing and fine tuning their existing business.
Santander already has a 13% share of loans and deposits in Mexico. That is well above the 10% bankers typically think constitutes sufficient scale in retail banking. It earned a return on tangible equity of 29% last year.
Moreover, it has lately been gaining market share in Mexico – largely at the expense of Banamex – and launched a car finance business from scratch two years ago, building up a 10% share in that market.
“We have a good and growing business in Mexico and don’t need to buy Banamex,” says Botín.
Nowadays, Santander – perhaps even more than other European banks – seems just as happy putting excess capital into smaller acquisitions, particularly in fintech, than large-scale M&A.
Bear in mind that under a new management structure announced in late February, Botín now directly oversees Santander’s key digital projects: payments company PagoNxt and the Digital Consumer Bank, which includes in-house digital lender Openbank and Santander Consumer Finance.
That personal attachment cements their importance and highlights the sense inside Santander that those two entities could, in time, prove transformational to its appeal to investors, perhaps even more so than deals like Banamex.
The bank also wants to allocate more capital towards sustainable finance, as this year’s acquisition of Brazilian environmental, social and governance consultancy WayCarbon shows.
Main issue
Even if Santander was determined to buy Banamex, rather than focus on other areas such as digital banking and sustainable finance, the main problem would be the impact on its valuation as an acquirer.
Investors treat European banks as a group: perhaps for good reason as most are in the same currency union. As a result, Santander’s shares fell to a 55% discount to book value after Russia’s invasion, while Mexican banks’ large premiums to book went even higher.
Big M&A is only worth the risk if it results in a big jump in the acquirer’s earnings per share. According to Berenberg, buying Banamex would dilute Santander’s earnings per share by 1.3% if it issued more shares to pay for it.
That was before the Ukraine crisis when its shares were trading higher. Today, without issuing shares, Santander does not have enough excess capital to pay for Banamex.
While Santander’s CET1 ratio of just under 12% gives a large buffer above its regulatory minimum, the message from investors is that it shouldn’t go any lower, according to Botín.
She and the bank have made it clear that it not going to push back against that view, even for Banamex.
One thing in Santander’s favour in this situation is the complexity of selling Banamex and carving it out from Citi, particularly as the US firm wants to hold onto its Mexican institutional clients.
That may give Santander enough time – perhaps a year or more – to generate enough capital to pay for the acquisition while keeping to a 12% CET1 ratio and 40% payout ratio for 2022.
Much of the capital could come from retained earnings, even just from its North American unit, which includes Mexico as well as the US.
On the margins, things like a potential exit from US mortgages could help Santander free up some capital that it could use to pay for Banamex. Yet Santander may not be about to stage an outright sale of its US retail bank – as BNP Paribas and HSBC did last year and BBVA did in 2020 – because it’s earning so much money.
The US is a core market for Santander, as chief executive José Antonio Álvarez confirmed to Euromoney late last year. And no wonder. Its US business had an underlying return on tangible equity of 24.5% last year. It was Santander’s biggest country earner, with an attributable profit of €2.3 billion, slightly ahead of Brazil, and far ahead of Mexico's €835 million. This is largely thanks to its US auto finance business, Santander Consumer USA, which has boomed on the back of government stimulus and sky-high used-car prices.
Santander Bank is concentrated in the US northeast. On a national level it only has a low single-digit share of national loans and deposits, compared with around 10% or more in each of Santander’s other key markets.
Nevertheless, the Spanish group sees Santander Bank as a useful platform for cheap deposit funding at a time when it wants to grow its US car-finance business – the country’s biggest sub-prime player – in the lower margin prime and near-prime markets.
Other barriers
Beyond the financial concerns, however, there may be other barriers inside Mexico that could stop Santander buying Banamex.
As Banamex would give Santander a 21% share in loans and a 25% share in deposits, it would likely face scrutiny from the competition authority.
In addition, there is the potentially more challenging question of whether or not it would be politically palatable. Although the government has promised to stay out of the process, Mexican president Andrés Manuel López Obrador has publicly expressed a preference for a local acquirer, as he suggested the profits would more likely be reinvested in Mexico rather than repatriated to shareholders in Spain, for example.
It is now less easy for banks in the developed markets to claim to be bringing technical assistance, as many emerging-market banks have leapfrogged developed-market peers struggling with big legacy IT systems and lower interest rates.
Botín, like her counterpart at BBVA, Carlos Torres Vila, has open and direct communication with López Obrador. Even before Banamex came along, she and the bank sought to work alongside the president to improve financial inclusion in Mexico.
Moreover, there are some strong Mexican contenders to buy Banamex – the biggest being Banorte. Others include Inbursa, a bank partly backed by Mexico’s richest man, Carlos Slim.
The strong valuation advantages these Mexican banks have over Santander is a far cry far from the early 2000s when Citi bought Banamex and BBVA bought Bancomer, a few years after the Mexican peso crisis – at a time when international bank acquisitions were also more politically fashionable in Mexico and elsewhere.
The Ukraine war, so far, has only widened that gap. Santander’s shares had slightly outperformed the European market in the two weeks after the invasion – falling by 14%, compared with a 16% fall in the Stoxx 600 Europe Banks index. Shares in Banorte, on the other hand, rose by 7%.
