When Santander entered the UK in 2004 with the acquisition of former building society Abbey National, the move completed the group’s transformation from a family-run regional mortgage lender into a multinational giant.
At the time Europe’s largest cross-border banking deal, the acquisition marked the culmination of a string of acquisitions under its swashbuckling “presidente” Emilio Botín, whose family have controlled Banco Santander since the early 20th century.
Today, however, the UK business is looking increasingly like an albatross around its Spanish owner’s neck.
The British bank acted as a successful proving ground for Mr Botín’s daughter Ana before she took over as group chairman in 2014 following her father’s death. But after years of falling profits, Santander UK this week drove its parent company to the first loss in its 163-year history as the result of a €6bn goodwill writedown. That leaves a business valued at €8.4bn in 2017 worth about €1bn in goodwill now.
The group blamed the impact of coronavirus on the global economic outlook, and other subsidiaries in Poland and the USA also suffered. However, the extent of the UK writedown — worth 85 per cent of its total value — renewed questions over the bank’s commitment to this market.
“I am sure they would have been resisting the writedown for a long time,” said former Santander UK chief financial officer Stephen Jones. “[But] the optimism that underpinned that goodwill value must have become unsustainable.
“Retail banking is a very highly regulated and competitive marketplace in the UK and the returns are not at all attractive. This doesn’t look like improving any time soon.”
Santander executives dismissed suggestions that the group’s strategy was a mistake or that the UK expansion had been poorly executed. They pointed out that Santander UK, which is run by chief executive Nathan Bostock, has paid €8bn in dividends to its parent since the acquisition of Abbey National in 2004.
Santander chief financial officer Jose Garcia Cantera said: “the share prices of UK banks have dropped significantly this year and since we bought the company . . . [but] in times of uncertainty I don’t think it’s a very good reflection of value. We believe our balance sheet is very strong and has a lot of value”.
Santander’s ability to turn round the fortunes of the UK business will be key to both Ms Botín’s legacy and to its hopes of achieving ambitious midterm targets that it has stuck to in spite of the coronavirus crisis. Underlying group profits climbed significantly under Ms Botín until the pandemic hit, but she has struggled to convince public markets. Shares were languishing well below their 2014 levels even before the start of this year.
Ms Botín has shrugged off criticisms about individual markets during her tenure, arguing that its diversified model — it operates in 10 “core markets” and a total of 20 countries — provides stability. This defence has been weakened by the global nature of the coronavirus pandemic.
Iacopo Dalu, a finance specialist at $337bn asset manager Janus Henderson, which has a small holding in Santander, said: “There is no diversification benefit in a pandemic and when central banks follow a ‘beggar thy neighbour’ approach to rates and currencies . . . They need to think about more radical strategic decisions.”
Santander repeatedly stressed on Wednesday that the goodwill writedowns had no impact on its underlying business, but the changes were more than a technical accounting tweak. Even unexpectedly positive news on capital levels — normally an obsession among Santander investors and analysts — was not enough to distract from the writedowns. Shares in the bank fell 5 per cent.
The writedown “says they expect pretty weak earnings in the UK in the future”, said a senior executive at a rival UK bank.
Santander’s challenges in the UK are not unique, but the history of its empire building has made the current environment particularly difficult. To Abbey National it added two more former building societies in 2008 — Alliance & Leicester and the remains of Bradford & Bingley. The acquisitions gave it a substantial presence in the mortgage sector but left it overexposed to a recent price war in the market.
Today three-quarters of Santander UK’s balance sheet is made up of mortgages. Profit margins have tumbled as regulatory changes left larger rivals with billions of excess capital to deploy in Britain, driving intense competition for new home loans.
The same factors, however, mean Santander UK’s balance sheet is very low risk. In the Bank of England’s most recent stress tests, it had the strongest post-stress capital ratio. Of the five major British lenders to report second-quarter results, only Barclays and Santander recorded a profit, as expected default rates on its mortgages remained low.
“In the short term we’re going to be making less money, but that doesn’t mean in the longer term it’s unattractive,” Mr Cantera added.
Meanwhile Santander has made a series of senior appointments to overhaul its European business. António Simões, HSBC’s former head of private banking, will join in September with a mission of bringing its various European businesses — including banks in Spain, Portugal, Poland and the UK — closer together.
“The UK in itself is a strong piece of business, but it also adds scale — and when you put this together with the rest of Europe, we can do many more things,” Mr Cantera said.
Later this year, ex-Nationwide deputy chief Tony Prestedge will join as deputy chief executive of Santander UK. He is seen as a potential successor to Mr Bostock.
Mr Simões will embark on an efficiency drive involving shared technology and investment to help individual subsidiaries compete with local market leaders like Lloyds Bank. But it will also involve substantial cost-cutting, particularly in the UK and Spain, which will lead to branch closures and job losses.
Despite the long-term optimism, however, even supporters of the bank’s strategy acknowledge that some challenges will remain out of its control — notably a potential hard Brexit.
Davide Serra, founder of London-based investment firm and Santander shareholder Algebris, said Ms Botín had done a good job of transforming “three subpar building societies” into a solid UK retail bank.
However, he added: “If the government is right and Brexit delivers a prosperous culture, it will make money. If the government is wrong and it turns into an economic nightmare with coronavirus on top, it will suffer . . . it is tied to the UK’s fate.”
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