Botin's winning formula

Its great trick is to acquire distressed assets… its secret has been to stay out of the sub-prime market

THE world, it would seem, is Emilio Botin's oyster. While many banking institutions around the globe splutter amid oceans of toxic debt, the chairman of Spanish bank Santander calmly leads it on a trawl for cast-off jewels.

On Monday, Santander homed in on Bradford & Bingley, snapping up the most lucrative parts of the former building society in a £612m deal. The move came just days after Santander sealed its acquisition of Alliance & Leicester, first announced in July. Combining these operations with Abbey National, which Santander purchased in 2004, will solidify the Spanish firm's position in third place in the UK savings league.

Most will recognise the brand, if they recognise it at all, from its sponsorship of the McLaren Formula 1 team, but its canny chairman is a familiar name in Scotland through the long-running relationship with Royal Bank of Scotland.

The two banks have been partners for some time with cross shareholdings and they have enjoyed a number of business dealings, most evident in Santander's support for RBS's acquisition of NatWest and in their joint acquisition last year with Belgian finance house Fortis of the Dutch bank ABN Amro.

The RBS-Santander shareholdings have since been sold (Santander offloaded its holding when it bought Abbey, and RBS disposed of its tranche at the time it took a 5% stake in Bank of China) but common ground remains.

It is believed the inspiration for RBS's giant headquarters at Gogarburn came from visits to Santander's corporate campus, which has an 18-hole golf course, tennis courts and even its own hotel.

Santander's great trick is to acquire distressed assets, snapping up all three former building societies at their lowest ebb.

Its secret has been to stay out of the sub-prime market and investment banking, thus avoiding the type of exposure that has wrought so much havoc among its international rivals. While it has a long history – being founded in 1857 – growth has been rapid in recent years, and taking advantage of the plight of others has been key to its development.

Now it will be able to unite its UK assets, cross-selling products and securing cost savings. But the beauty of this latest deal is that, in taking on £20bn of B&B's deposits, it will bridge the funding gap at Alliance & Leicester, which has substantially higher loans to deposits.

There seems to be some uncertainty over the future of the branch network, but there are no immediate plans for closures. As things stand it will have 1,286 branches.

The rapid consolidation of some 24 million UK customers under the Santander umbrella gave scarce pause to the financial rumour mill, as attention immediately focused on where Santander might go next. Now that it is ranked as the Eurozone's largest bank by market value, speculation is mounting that deals could be forthcoming in markets such as Germany, Eastern Europe and the US.

Botin has made clear his intention to capitalise upon the current turmoil that is crippling many rivals. With only the tiniest of exposures to the poisonous US sub-prime market, plus an estimated £38bn in capital reserves, Botin holds fast to his father's ambition that Santander should be "second to none".

However, the crafty 73-year-old patriarch of Spain's greatest banking dynasty is giving away little about the detail of how he expects to achieve this. Analysts who follow the company closely say more deals are almost certainly on the way, but they are reluctant to finger specific targets.

"What Santander is doing is selectively picking some good opportunities," said one, who preferred not to be named. "In this kind of market, you can imagine how the rumours go."

That analyst thought Santander might stick to smaller add-on deals in the immediate future, allowing the group to properly incorporate operations such as Brazil's Banco Real, its main prize from last year's carve-up of ABN Amro.

Others are less certain that Santander will pause for breath, as the near-unprecedented tumult in global money markets turns formerly unassailable organisations into relatively cheap takeover targets. Jagoba Garcia, banking analyst with specialist financial brokerage Fox-Pitt Kelton, argues that Santander could raise billions from the sale of assets to fund further acquisitions. From its position of strength, it could command a high price for either its asset management or insurance divisions.

Such a move would give Santander ample funds for a shopping spree through the ravaged US banking sector, where the Spanish firm's list of assets is limited to a 25% stake in Philadelphia's Sovereign Bancorp.

It is thought that Santander might use its dominant position in Latin America – which accounts for about one-third of the group's profits – as a launch pad for an offensive north of the Rio Grande. The Spaniards have in recent weeks been linked to possible deals for troubled US regionals such as Washington Mutual and Wachovia, though both of those banks were subsequently sold to other buyers.

"The US would be an obvious place for expansion, but it is very difficult to say where (Santander] might make any acquisitions," Garcia said.

Known for his shrewd business dealings and razor-sharp instincts, Botin will undoubtedly keep his cards close to his chest as the global situation continues to unfold.

The son of a banker, and a father to several, Emilio Botin III became chairman of Santander in 1986 when his father stepped down at the age of 84. Emilio II laid the groundwork for Santander's eventual global expansion through the transformation of Santander from a local bank on Spain's northern coast into one of the country's largest lenders.

One of the former chairman's boldest moves came in the 1950s, when Santander agreed to provide 95% of the funds for a new stadium for what was then a cash-strapped Barcelona Football Club. In exchange for getting rid of their small and shoddy pitch, the club's 30,000 members agreed to open accounts with Santander, giving the bank access to the rich region of Catalonia.

Though undoubtedly assisted by various Spanish regulatory requirements that have insulated banks in that country from dodgy mortgage securities and other exotic assets, Emilio III has shown the same sort of flair for banking that his father had.

Since the acquisition of ABN Amro, RBS and Fortis have both struggled, and the latter was saved from the brink of collapse at the start of last week when it was thrown an ?11.2bn lifeline from the governments of Belgium, Netherlands and Luxembourg.

Investors were worried that RBS would suffer from the problems at Fortis, which is looking to sell on its share of the ABN spoils. There was concern that it would adversely impact on RBS's integration plans on top of ongoing uncertainty about the Scottish bank's exposure to US lending and UK commercial property. RBS has reassured investors and savers that the crisis at Fortis would have no impact on the group.

There are no such concerns at Santander, which is seen as one of the few safe havens in Europe's banking industry. Part of this can be traced to how Botin approached the ABN Amro deal: he sold Banca Antonveneta of Italy for ?9bn just a week or so after paying ?6.6bn for the whole of Santander's share of the ABN empire.

A few months earlier, in the summer of 2007, Botin decided to sell all of the roughly 1,200 properties owned by Santander across Spain. That deal, just before the collapse of the Spanish property market, netted billions and paved the way for Santander's part in the takeover of ABN Amro.

Though Botin has avoided some of the biggest landmines in the sector, Santander does face challenges amid the current turmoil. It has been forced to substantially write down the value of its stake in Sovereign of the US, while there are also questions as to whether the economies of Latin America will continue their booming growth of recent years.

Despite these clouds, most believe there is an even brighter future ahead for Santander, which now ranks as the world's seventh-largest bank by market value.

"On Santander, one should really focus on the strength of the franchise," one analyst said. "They have more than 10,000 branches worldwide, which is very impressive. It is one of the few safe places to invest your money at the moment."

• Additional reporting by Terry Murden