Holding the Bag at BBVA

A new chairman must mop up a scandal--and rebuild shareholder trust

Francisco González Rodríguez, the chairman of Spain's No. 2 bank, Banco Bilbao Vizcaya Argentaria, spends an hour in the gym every day working up a good sweat. He needs the stamina for his task back at the office: restoring BBVA's damaged reputation. Disclosures of secret slush funds and allegations of money-laundering and bribery in Latin America have rocked BBVA all spring, causing mass resignations and undercutting morale at one of Spain's most prestigious blue chips.

González isn't implicated in any of these scandals: They took place at the old Banco Bilbao Vizcaya while he was chairman at rival Argentaria and before the banks merged in October, 1999. But it has fallen to him to run the gauntlet of public criticism and satisfy judicial authorities that BBVA is putting its house in order. Coming clean, at least, has ended months of anguish and infighting among top brass. When he learned of the covert accounts in September, 2000, says González, "I felt shocked, worried, and betrayed."

Many see a silver lining in the cloud over the bank, which, with $276 billion in assets, ranks No. 23 in Europe. González, a 58-year-old former computer programmer and stockbroker, is using the crisis as a catalyst for a dramatic overhaul of the bank's corporate governance. Most important, he's making a clean break from the Spanish practice of packing boards with cronies. "We have made a huge effort to be transparent," says González. Juan Iranza, director of the Institute of Economic Studies in Madrid, a private think tank, agrees that BBVA "will emerge strengthened from the scandal," with a new board that includes truly independent directors.

Still, BBVA represents one of the biggest scandals to hit Europe's banking sector in years. The first internal disclosure of the secret accounts to González, almost two years ago, set off a chain of events that is still rocking Spain. It was only after a four-month-long internal power struggle that González was able to obtain details of the hidden accounts, which, among other things, were used to set up secret U.S.-based pension funds and to make political contributions in Venezuela. In December, 2000, he insisted on closing the accounts, transferring the entire $200 million slush fund to the bank's balance sheet, paying taxes on the money, and reporting the irregularity to the Bank of Spain. On Dec. 18, 2001, González' then co-chairman, Emilio Ybarra, and Chief Executive Pedro Luis Uriarte resigned. Ybarra has taken full responsibility for the undisclosed accounts. He is being investigated for allegedly misappropriating funds and falsifying accounts. He was not available for comment. In March and April, 17 additional board members and five executives resigned. The central bank has handed the case over to crusading Spanish magistrate Baltazar Garzón, who is now questioning the former bankers about the accounts.

Even worse than the discovery of the secret accounts, González says, was the recent revival of 1999 allegations by an ex-employee from BBV's Puerto Rico branch that the bank's management had condoned money-laundering and bribery in its Latin American operations to gain control of banks in Peru, Colombia, and Mexico. The Federal Bureau of Investigation and other U.S. authorities have, to date, failed to find hard evidence. The bank says the charges are unfounded and stem largely from the false testimony of the ex-employee, who was convicted of embezzling $49,000 from the old BBV. When the former employee resurfaced in Spain in December and took his claims to Garzón, a stunned González sent an audit team to Latin America. "We have examined all the transactions thoroughly, and there was no wrongdoing," González says. "We never made payments that were against the law."

Against this background, González says, it's urgent that BBVA win back shareholder trust by becoming one of the world's most transparent companies. The CEO has already appointed three new directors, including Susana Rodríguez Vidarte, the 47-year-old dean of the economics and finance school La Commercial, at the University of Deusto in Bilbao, to his slimmed-down 15-member board. Several more outside directors will be named in coming weeks. And under a new corporate-governance code, top executive salaries will be published--rare in continental Europe--and the compensation committee will be independent. "BBVA will have the most advanced code of governance and standard of transparency," González says. "Society is expecting it. It's a big opportunity for Spain to be at the forefront."

Many Spanish executives agree that González has the experience and the character to ride out the storm. An austere boss whose main pastimes are high-energy workouts and plowing through business tomes, he eschews the trappings of success, such as luxury cars and yachts. He also earns high marks as a manager. During his three-year stint at the helm of Argentaria, he boosted return on equity from 10.42% to 16.17%, and transformed it into one of Spain's most profitable banks. Before that, in 1988, he founded one of Madrid's first independent brokerage firms. He and his partners sold it seven years later, for $400 million, to Merrill Lynch & Co.

At BBVA, the tech-savvy González plans to use the Internet to promote innovative new services. BBVA was a pioneer in pushing customer payments and information services via cellular phone. "We have a big opportunity to transform a big, big bank into an even bigger services company," he says. Raising BBVA's market share and profits--and cutting its already low costs--are also high on the list. Despite the turbulence of the scandals, the world economic slowdown, and the Argentine crisis--which led to a $1.2 billion BBVA write-off last year--the bank turned in above-average 2001 results: Operating income jumped 27.9%, to $5 billion. In the first quarter, net profit was up 6%, to $531 million, while its cost-to-revenue ratio fell to 47.3%--unrivaled in Europe outside Britain. "He has always achieved his targets," says Javier Bernat, a bank analyst with Caja Madrid Bolsa in Madrid.

Another González goal: to be the first to make a cross-border bank acquisition in Europe. With a market capitalization of around $40 billion, BBVA ranks third in the euro zone. But national politics have thwarted BBVA's attempts to expand abroad. BBVA holds a 14.9% stake in Banca Nazionale del Lavoro and 3% in Crédit Lyonnais. "At some moment, [something will happen] and some banks will have the opportunity to make a move," says González.

The dealmaking must be deferred, however, until the last whiff of scandal is gone. González and former Co-Chairman Ybarra will be questioned together on June 10 by magistrate Garzón about the concealed accounts. Few expect the investigations to have any effect on BBVA's performance or to undermine González, but no one rules out additional disclosures. Not many bank bosses undergo the kind of trial by fire that González has faced in his less than six months as chairman. But if he prevails, managing a bank that's not in the midst of a crisis will seem easy.

By Gail Edmondson in Madrid

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