HedgeThink is proud to present the interview with Ana Botin, Santander Group Chair and Bloomberg Television anchor and editor-at-large Francine Lacqua. The interview covered such topics as Santander’s share price and emerging markets, currencies, Santander’s US and Brazil businesses, strategy, Fintech, European regulation and Women in banking.
1) On currencies
BOTIN: Currencies have been positive for Santander this year, the will probably (have a) negative effect on our PNL this year because of the Latin American currencies. So our businesses, we expect to do very well, but we will be dragged down by the currency when we convert our earnings into Euros. We hedge our capital 100%, so that’s not an issue. It’s very difficult to know what the fair value of the Euro is, I don’t know if it’s 1.15, 1.12 or 1.18, usually currencies tend to overshoot, we had the Euro at 1.35, 140, clearly the purchasing power parity was not there, it’s probably more at 1.15, so it’s roughly where we are today. Our business in Europe, we expect to do better over the next few years, because our customers are doing better. I was just with a customer in Alicante, who buys a lot of things in China. Consumption is going up in Spain, and the cost of all the products that they import is really going down, so they’re going to be very competitive. Spain has been growing exports in a very significant way over the last twelve months – that’s one of the effects of the cheaper Euro.
2) On Santander’s share price and emerging markets:
BOTIN: I think global growth will be slower, so it’s obviously going to slow down. China is a big economy but I think the important thing about Santander is we are very balanced. So 50% – roughly – of our earnings are coming from developed markets that are huge beneficiaries from what is going on. So, you know, Spain, Germany – we are the biggest consumer bank in Germany with 14% market share. We have a very good business in the U.S. with good returns – we can do much better but it’s doing well. So, you know, that provides a very, very strong buffer against all the emerging markets. I always say Santander tends to do better when things are complicated because we are more stable. When everything is doing very well we are usually going to underperform and, again, if you look at any point in time, obviously, as I was saying, if you looked at January to April, we did really well – if you look April, or even January, to now. So, you know, I am quite confident on what we can do for the next few years in spite of emerging markets being a bit volatile at the moment.
LACQUA: Your share price has come under pressure, I wouldn’t say significant pressure, but under pressure. How much do you think this is out of your control?
BOTIN: Well I would like, and I know this is a big ask, but I think we should be measured, since we increased capital – we did a big capital increase at 6.18 euros in January – and we did very well until about mid-April, our share price was up about 16/17%, in line or better than most of our peers. Since then, there have been a number of issues. You know, Brazilian banks are down I think it’s 35% since then, Spanish banks are down, Polish banks are down, so, you know, it’s the market. I think what’s important is that we have shown very, very strong results. So our latest results, our profits were up 25%, we had increased our capital ratio to close to 10%, cost income I mentioned at 47% and return on tangible equity at 11.5% – you know, these are our June numbers – and very importantly, after having increased our profits the year previously by 30%, so we are doing well. Unfortunately, you know, global growth is slowing down and emerging markets are now out of favour and so that is not helping us in our share price.
3) On European regulation:
BOTIN: The U.S. did all the changes the UK has done. Most of them – Continental Europe, the rest of Europe is, sort of, in the process. This has a cost and so QE needs banks that can then transmit QE to the economy, right? So we can make loans and give you a mortgage and fund a start-up. Because regulation has not been implemented in many aspects – I think I was told in Brussels a few days ago there are still 300 pending pieces of legislation in banks, I heard the number 400. So let’s say it’s between 300 and 400: This means that banks are going to be holding back a bit, even though we area increasing lending, for example we are increasing lending in Spain right now, but I think there is a drag effect because of this uncertainty and because this regulation is still in the process of being implemented.
LACQUA: We are also seeing a lot of job cuts in, for example, some of the Swiss banks. Do you think the landscape overall, I’m not talking about Santander, but overall for European banks, will significantly change in the next two-to-three years?
BOTIN: For Continental Europe again, the structural reform has not happened yet so there’s still not 100% certainty. So we had Volker in the U.S., we had Vickers in the UK and Liikanen has not been decided. That’s going to have potentially an effect on investment banking. I’m not that familiar because we are not in that business but for retail banks like us, doing cross-border transactions, I don’t think… I think what’s happened with the SSM is very important because now supervision is coordinated. It’s a unique supervisor for all European banks and that means that there will be common rules and this is important for transparency. So now investors and bank depositors, bank customers know that we are subject to the same rules as a German bank or a French bank. We started this in November of last year. I think it’s been a huge progress – a lot of work but a huge progress – and I think it’s very positive both for the economy, for consumers but also for us.
4) On fintech and Apple Pay:
BOTIN: I think banks are already transforming, becoming more digital. It would not be possible for us to have a 47% cost-income without the investment we have already made in digital. We are opening, I think it’s a third of the current accounts in the UK, and in Spain, and in many other countries online. This of course means that it costs us a fraction of what it would if you opened in a branch but, by the way, you can always go to a branch. We have 13,000 branches and we believe very much in that personal contact. So that is what I call the ‘BAU’ – the ‘business as usual’ – and our goal there is very simple: we want you to be able to see, manage and buy all of our products through all our channels. So you can bank with us on the mobile, on the fixed internet, on the phone or in the branch. We are almost there – we are not quite there but almost there in all our banks and that is a very important target.
LACQUA: How much do you look at the competition? You were talking about offering, for example, Apple Pay as a service.
BOTIN: Apple Pay is not a good business for Santander but it is a good business for my customers so I think eventually it will be a good business for us. We launched Apple Pay in the UK – we were the first group – and our customers love it. We did it because a significant proportion of our Santander UK customers had an iPhone so we thought we have to offer them Apple Pay as soon as we can. What is interesting is that we now developed a great app called ‘Spendlytics’ around Apple Pay which is making customers more loyal to Santander because you can see where you spend money – it’s a great tool and it’s very popular. So I think we need to continue to innovate and I think that is the key thing. Having said this, I think the important thing, and I said this recently in Frankfurt at a meeting, you know, we need a fair playing market for all and so the rules have to be the same for banks and new entrants and I think this is incredibly important. So sharing information: if I share my customer information, the new entrants should share their customer information because otherwise it’s very difficult to run a business, so I think that’s the key thing.
LACQUA: Do you think they will? Do you think regulators are looking at this and understanding? Because the problem about disruptors is they move so fast that regulators really have to understand that market.
BOTIN: Yes, I think they are and I think one of the things we are doing also is, and I think there are many of these new companies with which we are collaborating, again, thinking about our customers. So we are working with Apple, with Apple Pay, you know, Funding Circle – we are the first bank to team up with them – and when I say no to a customer because my lending criteria don’t accept his credit, or her credit rating, we send them to Funding Circle. So I believe in collaboration with the new entrants but not with all of them because some of them are actually not ready to do that but I think we are trying very hard to work with the new entrants and to do our own disruptive strategies.
5) On Santander’s US business:
BOTIN: We’re absolutely committed to the U.S., it’s a great country. In spite of the regulatory difficulties, our return on equity in the U.S. is 8.5%, which is not that bad, right? It covers our cost of equity. Our aim is to get to 11% return on equity but, as I said, very importantly, is to meet the regulatory requirements and our own standards.
LACQUA: You mentioned the U.S. There are concerns around the U.S. because the Fed’s failed the stress test on Santander. How are you addressing it?
BOTIN: So I want to say it’s not just the Fed. We need to meet our own, very demanding internal standards and we are working very hard. The first thing we did is change the team and the governance. We have a new board in the U.S., a new chairman at the holding co. level, a new chairman at the SCUSA level, at Santander Consumer and a new team. So I believe we now understand what we need to do and our aim is to show significant progress, significant progress next year on the regulatory agenda.
6) On Santander’s strategy
BOTIN: We know where we want to go; we now need to execute. Again, we’re a bank, so it’s not going to be as exciting as the next 12 months, it’s not going to be about new people and raising capital – that is over. It’s now about executing for our customers and continuing to deliver for our shareholders. That is a big task, and I always think about our people and our team. If we cannot attract the best team – I want to have the best team in the UK, the best team in Brazil, and I think we have that today. We maybe can do a bit more in terms of building and strengthening at second and third level, but I think we’re in a pretty good place. And then of course, the macro. I think that is the biggest challenge we all have. But as I said, the balance between developing and developed at Santander, those ten co-markets, are in Europe and the Americas. It’s a split between developing and developed, and that’s going to give us more stability than others. So if things get quite bad, we should do better than others. Now we will be affected, but less than others. That is what I believe will happen.
LACQUA: So no asset sales, and no further capital raising?
BOTIN: We have huge potential just to grow with our existing customers, so we don’t need to buy. We have, and we will continue to look at opportunities in our core markets, but it’s not something we need to do.
LACQUA: How do you make a customer loyal? Is it service, is it marketing, is it something else?
BOTIN: I think today you need to do everything right. Customers have high expectations, so you need to deliver excellent service, you need to deliver great products, and you need to deliver them in a very cost-efficient way, i.e. the price has to be right. The best example is our 1-2-3 strategy, which we started in the UK. We are now rolling it out in Spain, and it’s a strategy, it’s about loyal customers, it’s about lasting relationships with our customers.
LACQUA: So is loyalty at the moment the most important thing, because then you can grow in years from now?
BOTIN: We want to be the best bank, the best retail and commercial bank for our people, our customers, our shareholders and our communities, i.e. the strategy has to make sense for our customers but also for our shareholders. The reason that we can square the circle is that we have a best-in-class cost income. We reported in June a cost-income ratio of a bit less than 47%. That is best-in-class among all large banks in the world, and that’s what allows us to deliver great products, great prices and excellent service. Now, we’re not there yet by any means, and that’s exactly what we’re going to work on over the next few years: how we do that in our larger markets. Clearly the UK is an example and a reference for what we want to do in the group.
7) On Santander’s Brazil business
BOTIN: Our Brazilian business for quite a while was not performing as well as we would have liked. That is quite clear, and I acknowledge that we did not do as well as we should have for a number of years. I would say that for the last year, last 18 months, we have done much better. So we’ve made a lot of progress in terms of integration and cost-cutting, we have de-risked the bank, which is very important for the times ahead of us, we have strengthened the management also. It’s not going to be easy, and I think Brazil has two possibilities. One is the one we believe in as always. Brazil has had a number of these situations in the past and they’ve always taken the path of making the reforms, taking the tough decisions, which are not easy for the people, not easy for the economy, and that’s what’s happening right now. And we believe that’s going to continue to be the case. Now there’s another scenario which is more negative, which would obviously mean more years of low growth or recession. We think Brazil has taken the right measures so far, and we’re confident that after maybe 15, 16, or half of 16, we’ll see growth again.
8) On women in banking
BOTIN: We need more diversity, and it’s not just about women. I think more diversity in companies and in boards, and I think that women are a significant part of that diversity. I’m very proud that we now have a woman Chair in the UK, a woman Chair in Santander Consumer, and we are increasing the programmes to support senior women. I think it’s a matter time, but there’s a lot of work to do, and I think we need to work together with the men.