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Banco Santander's Emilio Botín takes on the world

March 23, 2012: 5:00 AM ET

Europe's foxiest banker has built a financial powerhouse by acquiring prominent foreign banks for bargain prices.

By Charles P. Wallace, contributor

Santander chairman Emilio Botín next to

Santander chairman Emilio Botín next to "Everest," a 1,220-year-old olive tree at the bank's campus outside Madrid

FORTUNE -- The view from Banco Santander's flying-saucer-shaped headquarters, sitting atop a sprawling 340-acre campus outside Madrid, is breathtaking. You can see the bank's championship 18-hole golf course, a nursery for 550 children, and a grove of 1,000-year-old olive trees transplanted from Sicily at a reported cost of $50,000 a pop. Given all that opulence, you'd never guess that Emilio Botín, the 77-year-old chairman of continental Europe's biggest bank by market capitalization, is having his worst year ever. "We're in an international crisis -- things haven't been this bad since the 1930s," Botín admits reflectively during an interview in early February. No kidding. Just two days earlier he had faced an uncharacteristically hostile Spanish press corps after reporting that the bank's earnings had fallen 36% in 2011. But the bald, suntanned Botín (pronounced boh-TEEN) immediately brightened up. Smiling mischievously, he adds, "No doubt it is a significant problem, but the last four years have also been a big opportunity for Santander." In two years, Botín predicts, profits will grow by 50%.

Botín may be enduring a perfect storm in Europe, but chances are he will find a way to profit from it. Although hardly known in the U.S. -- his interview with Fortune is his first with an American publication -- Botín has emerged as one of the world's savviest bankers. The elegantly tailored Botín casts a long shadow in the world of international banking. Like former Bank of America (BAC) CEO Ken Lewis, Botín is a bold risk-taker who has proven extremely clever at growing through mergers, but unlike Lewis he has created a sustainable profit machine.

What's behind Botín's success? His strategy is to acquire prominent foreign banks that have a minimum 10% market share and that are in some sort of financial straits. He buys the bank at a bargain-basement price, installs his own management team, and then gets a stock market listing for an independent subsidiary. While his European rivals were expanding into such risky areas as investment banking and unpronounceable derivatives, Botín steered clear of those businesses and did his banking the old-fashioned way: bread-and-butter consumer and business loans to high-quality risks. At the same time, costs at Santander (sahn-tahn-DARE) account for only 40¢ for every dollar of revenue, while German competitor Deutsche Bank (DB) spends 65¢, and super-efficient HSBC (HBC) spends 55¢. Key to cost savings has been Santander's state-of-the-art computer system, dubbed Parthenon, which has slashed back-office expenses at all its subsidiaries. At its Abbey National subsidiary in Britain, for example, back-office staff went from 70% of the payroll to 30%.

Botín's strategy often requires him to make billion-dollar decisions in the blink of an eye. In just one deal in 2007, for example, Botín bought the Italian lender Banca Antonveneta and then sold it to a competitor less than a month later for a $4 billion profit even before his check for the purchase price had cleared. Crosstown rival Francisco Gonzalez, head of Spain's second-ranked Grupo BBVA (BBVA), frequently tells reporters, "I like to sleep at night," suggesting he thinks his bank is more conservatively managed. But BBVA has also underperformed Santander (STD) because it pays far higher prices for acquisitions and has shown less skill implementing its strategy.

Despite his critics, over the past 25 years Botín has steered Banco Santander from a sleepy regional player -- once the seventh-largest bank in Spain -- to the country's largest bank, with about 20% of the market, and Europe's eighth largest by assets. Thanks to the inspiration of his father, who preceded him as chairman and who established a branch office in Havana in 1947, Botín now has powerful franchises in Brazil, Chile, Mexico, Argentina, Germany, Britain, Poland, and, yes, the U.S. (through his 2007 acquisition of Sovereign Bancorp at a typical bargain-basement price). Although still technically a Spanish bank, Santander now makes more than half its profits in Latin America (see map). Perhaps no other bank in the world, with the possible exception of Britain's HSBC, has been so successful at running a diverse overseas empire.

"Botín was smart enough to see, way before anyone else, that international diversification was the best way to grow a small bank," says Santiago López Diaz, banking analyst at Exane BNP Paribas in Madrid. "Now Santander has an incredible position in every product line and is one of the few institutions in euroland that doesn't need to change its business model."

That's because the developing world, where Botín has been expanding, is where the growth is. When Fortune asked Botín where the best investment opportunities are likely to lie in the months ahead, he responded without hesitation with a list that might seem surprising for one of Europe's key banks: (1) Asia, (2) Latin America, (3) the U.S., (4) Europe.

While foreign diversification has largely helped insulate Santander from the current financial crisis in Europe -- Santander is still very profitable, while rivals like Britain's Royal Bank of Scotland (RBS) and France's Crédit Agricole have reported losses for 2011 -- it isn't totally immune.

Spain's housing bust has left Santander with a portfolio of $77 billion of real estate loans, of which 28.6% are nonperforming. Also, the European economy is contracting. Spain's GDP, for example, fell by 0.3% in the fourth quarter. Because of Santander's heavy exposure in Spain -- it has $290 billion in outstanding loans there, or about 27% of its total portfolio -- it has been forced by European authorities to raise $20 billion in new capital, the most of any European bank. As a result, the bank had to raise reserves from 5% to 9%. The new conservative Spanish government elected last fall has also forced the bank to set aside another $5.4 billion for bad property loans, which has seriously hurt the group's earnings. Without all those measures, Santander's profit last year would have been $9 billion instead of $7 billion. Spain accounts for only 10% of the bank's profits (four years ago it was 30%) but 90% of its headaches.

Institutional investors, who view Santander more as a Spanish bank than as an international one, have hammered its stock. Its share price has dropped by 40% in the past two years -- much less than many other large banks, to be sure, but still a big hit. "Santander is paying the price for being in Spain," says Inigo Vega, an analyst at Chevreux, the investment bank owned by France's Credit Agricole. "It's not only because of Spain's macroeconomic problems, but also investors worry that its own problems can make Santander's cost of capital more expensive."

"In my 40 years as a banker I have never seen anything like this," says Alfredo Saenz, Santander's CEO and Botín's second in command. "The private funding market is still closed to even the best institutions in Europe." The European Central Bank's bailout program, which lets European banks borrow funds at 1% and invest them at much higher rates, has temporarily prevented the Greek crisis from metastasizing and causing a Lehman Brothers-type failure. While other Spanish banks have gorged on the ECB's cash handout, Santander has been cautious, borrowing a relatively small amount from the ECB.

So how will Botín make good on his pledge to boost profits 50% over the next two years? He says he plans to keep making foreign acquisitions at bargain prices. He also says he'll stick by Santander's tried-and-true formula for plain-vanilla banking, a philosophy outlined by Botín's father, also known as Emilio, who was the bank's chairman until his son took over in 1986. When Santander was still a small regional bank, Botín recalled, his father would summon his branch managers each summer to his sprawling home called El Promontorio in the hills overlooking the port city of Santander (hence the name). There he would review every loan to local businessmen worth more than $2 million. Each executive had to explain to the chairman his reasoning for giving the loan and the likelihood that it would be repaid.

Spaniards protesting politicians and bankers last year carry a banner displaying Emilio Botín.

Spaniards protesting politicians and bankers last year carry a banner displaying Emilio Botín.

Botín says the bank still works pretty much in the same way. He still meets with his managers to hear about their loan portfolios, only now they fly in from around the world. And whether it's in Brazil or New England or Britain, Santander is still in the same rather staid business of giving mortgages and loans to consumers and small and medium-size companies. It has expanded that business by cross-selling customers with such products as life insurance and credit cards. This cross-selling, which is one of Santander's strongest points, has been the holy grail of retail banking since the 1970s, but few other banks have been able to make a success of it, certainly not in the U.S., where customers seem to prefer to shop around for each service. "We're a boring bank because we always do the same thing," Botín says.

Botín gets his kicks from doing acquisitions. Robert Tornabell, a professor of retail banking at the ESADE business school in Barcelona, has followed Botín's career closely and has advised the bank. He says Botín is a born wheeler-dealer who thrills at the chase and the chance to make a killing. "I once asked him, 'Are you a hunter?' " Tornabell recalls. "He replied: 'Robert, at some level, it's like hunting in Africa. Can you imagine an elephant at 60 miles an hour charging at you?' "

There are literally dozens of deals listed in the bank's own lavishly printed history book of Botín's exploits. The deals moved on two fronts: diversifying Santander's overseas operations and improving its heft in the Spanish market.

In the early '90s, Botín engaged in a series of local acquisitions -- and bitter board fights -- that built Santander into Spain's largest bank. Then it was time to turn to the developing world. By far Botín's boldest move was going into Brazil when the country was racked by hyperinflation and political instability. The story of his Brazilian success actually began in the U.S., where Botín bought a big stake in First Union (then First Fidelity) in 1993. Faced with whether to grow the American business or cash out, Botín sold it after seven years at a huge profit. "At that point we needed capital to invest in Latin America, so the chairman said to me, 'We have a capital gain of $2 billion. Take it,' " Rodriguez Inciarte, the bank's executive VP for strategy, recalls.

Flush with First Union's cash, Santander in 2000 outbid its rivals, which included Citibank (C), for ownership of the newly privatized Banespa Bank, which was still reeling from management problems and billions in losses. "It was a big opportunity, and we knew we were paying too much," Botín recalled. "We thought, 'We can't lose this deal.' We offered $1 billion more than anyone else." Santander paid $3.5 billion for the bank. But 11 years later Santander's Brazilian operations are now worth an estimated $34 billion and earn more than $3 billion every year in profits. Santander is now the third-largest bank in Brazil. "It's a very attractive business, where real interest rates are high and spreads are good," says Richard Mattione, a fund manager for GMO in Boston who specializes in Latin America.

Two other foreign acquisitions illustrate Botín's deft dealmaking abilities. He decided to reenter the U.S. market in 2005 by buying 25% of Philadelphia-based Sovereign Bancorp for $2.4 billion. Sovereign also fits Botín's formula: a plain-vanilla bank, dealing primarily in mortgages and small-business loans. Botín says he scoured America looking for a target and rejected possible takeovers in Texas and Florida. "The Northeast is the most affluent part of America, where you have great universities," Botín says. "It is bigger than the economy of Spain, and we want to be a part of that."

While Santander paid $20 a share for a 19.8% stake in Sovereign in 2007, it bought the remainder of the bank two years later for a mere $3 a share. It was the day after Wachovia collapsed into the arms of Wells Fargo (WFC), and U.S. bank shares were in free fall. Sovereign obviously has nowhere near 10% of the U.S. market, but Botín says he is looking at new acquisitions to increase his share in the New England region. Sovereign earned a respectable $700 million profit in 2011, up 24% from 2010.

Botín's other big move was in Britain, where he acquired Abbey National, the nation's second-largest mortgage lender; the struggling Alliance & Leicester; and another small savings bank. "These were quite good deals for Santander," says Simon Willis, a bank analyst at London-based stockbroker Daniel Stewart.

Ana Patricia Botín, the chairman's daughter, runs Santander's British operations.

Ana Patricia Botín, the chairman's daughter, runs Santander's British operations.

The British operation is being watched for another reason: Ana Patricia Botín, the chairman's 51-year-old daughter. A Harvard Business School grad who worked for J.P. Morgan (JPM) in the U.S. for seven years before joining her father, Ana Patricia was put in charge of the British business in 2010. Under her, the British bank recently bought the branches of RBS in England, which will bring Santander's total to around 8% of the British market, with a 13% market share in mortgages. But the bank has even greater ambitions there.

"The strength of the Santander model is having a strong relationship with its retail customers, and we don't have that yet in the U.K.," Ana Patricia says, adding that the bank will spend $750 million over the next two years to attract more small and medium-size business clients. "We are going to take market share from the big British banks," she asserts.

Santander watchers are also closely following Ana Patricia's career for clues about whether she will succeed her father when he decides to retire. Botín is not exactly forthcoming on the topic, noting that his family now controls only 2% of Santander's shares -- worth $1.2 billion at the current depressed market price -- down from 40% of the shares when he took over as chairman. "The board has an idea of who the new people in charge might be. We don't do what other banks do and announce it two years in advance."

Anyway, Botín has had other things on his mind. Two years ago he was skewered in the press when it was revealed that a secret bank account had been opened in his father's name in Switzerland. Botín says he made a voluntary declaration after the account came to light and paid $274 million in back taxes. Likewise, he believes Saenz, his CEO, was unjustly convicted of making false criminal accusations against clients who allegedly owed Santander money. Saenz, who had been sentenced to four months in prison after the Spanish Supreme Court upheld the conviction, was pardoned by the outgoing government of Prime Minister José Luis Rodríguez Zapatero last fall.

Apart from those episodes, it has been a bad stretch for bankers, and Botín is no exception. His stock is down and his earnings are soft. Some analysts maintain that Botín overpaid for some deals, but concede they all turned out to be winners. There is some grousing about the lavish headquarters, especially now that there has been a sharp fall in the share price. But few seem to blame Botín, who earns about $7 million a year in salary and bonuses -- modest by banking standards.

True to his hunting nature, he now is focusing on more acquisitions. In early March he bought Polish bank Kredyt from struggling Belgian lender KBC. He paid for it with $1 billion in stock of Bank Zachodni, which Santander had bought from Allied Irish Bank for $5 billion last year. The deal gives Botín his treasured 10% of the Polish market. According to Rodriguez Inciarte, Botín has also signed deals to get Santander into the Chinese auto-lending market.

"Botín is the new master of Spain," says one analyst who nervously requests anonymity. "He is more respected than the King."

--Charles P. Wallace is a New York-based writer specializing in financial services and international economics.

Reporter associate: Maria del Mar Piedrabuena

This story is from the April 9, 2012 issue of Fortune.

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