Awards for Excellence 2012: Best Bank

How can a Spanish bank, given all of the problems in its home country’s economy and financial system, be considered one of the leading banks in the world?

Well, Santander is nowhere near as Spanish as its name and the outside focus on its business implies. Spain accounts for only a quarter of the bank’s assets, and just 12% of attributable profits in 2011.

Over the past decade, chairman Emilio Botín and his management team have overseen a dramatic transformation of Santander’s business, which has enabled the bank to deliver impressive and consistent growth and profitability while withstanding the shocks in its domestic market.

Since the beginning of 2010, Santander has produced impressive group profits in every quarter – from a high of €2.2 billion in the second quarter of 2010 to a low of €1.4 billion in the corresponding period last year. In the first quarter of 2012, the bank delivered an attributable profit of €1.6 billion.

It has managed to achieve this performance for two main reasons. The first is diversification. The star performer has been Brazil, where it merged its existing business with Banco Real in 2007 after the latter’s purchase from ABN Amro. Brazil accounted for 27% of Santander’s group profits in 2011. In total, Latin America delivered 52% of group profits in the first quarter this year, thanks to strong contributions from Mexico and Chile in particular.

But Santander is not merely an emerging market bank outside Spain. Around 30% of its profits now come from markets that it characterizes as "mature, with stable provisions". The star performer is its UK business, which accounts for 13% of profit.

Santander’s strategy is to be a big player in all of its key geographies. For the most part it achieves this. In Brazil, for example, its market share is 10%. In Mexico this rises to 16% and in Chile it is as much as 20%. In Europe, its share of the UK market has grown to 12%. Even in Germany, its consumer finance operation has a 14% share of the market it operates in and 7 million customers.

The second key reason is efficiency. Santander’s management believes that such scale, as well as continuous investment in technology, enables the bank to be among the most efficient in the world. This is borne out by its cost-income ratio of 44.7%, the best of any of the big international banks.

Scale was a key driver in its decision in February this year to merge its Bank Zachodni WBK unit in Poland with Kredyt Bank, KBC’s subsidiary. The merger will be carried out through an exchange of Zachodni shares, with virtually no impact on Santander’s capital ratios. Santander will have about 76% of the combined bank, which will be a solid third-ranked player in the Polish market, with a market share of about 10%. No other western European bank managed a similar, growth-driven transaction this year.

Santander is a bank that shows the benefits of a subsidiary model, in which its businesses are autonomous in terms of capital and liquidity and locally supervised. The bank has largely been able to meet its capital needs through dividend payments to the group from these subsidiaries.

However, when Santander has needed capital, it has acted quickly. Following the announcement by the European Banking Association that banks would be obliged to hold 9% Basle 2.5 core capital by June 30 2012, Santander moved to meet its requirement six months ahead of deadline. In less than two months, Santander sold 7.8% of Banco Santander Chile, reducing its stake to 67% and raising $950 million, boosting group core capital by 11 basis points. It transferred 4.41% of Banco Santander Brasil to a large international financial institution, which will deliver these shares when they mature in 2013. The bank raised €1.943 billion in fresh capital through the exchange of preferred shares for new ordinary shares. And it sold Santander Colombia to CorpBanca of Chile for $1.225 billion, generating a capital gain of €615 million. Colombia had accounted for just 0.5% of group profit.

Santander’s core capital by Basle II measures is now 10.1%. Since 2009, it has reduced its loan-to-deposit ratio from 135% to 115%. Over the same period it has increased its liquidity from €154 billion to €190 billion.

Of course, Santander faces enormous challenges. Brazil’s economy is slowing. The UK banking system remains strained and challenged by regulators. And the problems in Spain might get a lot worse. Santander has halved its real estate portfolio there over the past two years, so that it now constitutes just 10% of assets in the country. But provisions continue to rise, and investors can expect more of them throughout 2012.

But it is hard to think of a bank that could have faced the challenges that Santander has already overcome better than Botín and Co have done. And the smart money has to be on them doing so again.