Banco Santander Goes on a Shopping Spree

In his almost quarter-century as chairman, Emilio Botín has built Banco Santander (STD) into the euro region's most valuable bank, in part by engineering more than $70 billion of acquisitions. Now he's pursuing more deals, even as global investors shun Spanish banks, concerned that the country will struggle to control its budget deficit, which ballooned to 11.2 percent of gross domestic product last year.

The 153-year-old institution is bidding for the German consumer unit of Sweden's SEB and 300 U.K. branches of Royal Bank of Scotland (RBS). In June it agreed to buy back almost a quarter of its Mexican unit from Bank of America (BAC) for $2.5 billion, as well as purchase $3.2 billion of auto loans from Citigroup (C). "Why shouldn't they continue to conduct business as usual if opportunities arise and they don't think they have any issues with solvency?" asks Kevin Lilley, who manages about $1.5 billion in Continental European shares, including Santander, at Royal London Asset Management.

Santander navigated the financial crisis without an unprofitable quarter after avoiding U.S. subprime debt. As well as diversifying into markets beyond Spain, the bank stuck to a basic business model that has it earning about 70 percent of its profit from retail operations. At the same time, Bank of Spain regulations meant it and other Spanish lenders had to build up reserves in good times to cover future losses.

Botín, 75, told shareholders in June that the bank will earn about as much in 2010 as it did in 2009, when profit totaled $10.9 billion. Botín and other Santander executives would not comment for this story.

The stress tests being conducted on European banks may provide further evidence of Santander's solid position. "I'm confident Santander will fare very well in the stress tests," says Daragh Quinn, an analyst at Nomura International in Madrid, "especially bearing in mind that only a third of its loan book is in Spain."

Juan Inciarte, Santander's head of strategy, said at a seminar in Madrid this month that growth and diversification are "in the DNA" of the bank. It was founded in 1857 in the northern Spanish port of the same name to finance trade with Latin America.

Under Botín, the scion of a dynasty that's helped run the bank for 115 years, Santander has grown from the sixth-largest lender in Spain, with 700,000 clients, to a company with 92 million customers and the biggest market value of any bank in the 16 nations sharing the euro. Botín led the expansion by buying lenders in Brazil and the U.K. and stretching Santander's reach across nine main markets. That breadth helped it weather Spain's economic slump. Brazil will contribute more to Santander's profit than Spain for the first time this year, Botin told shareholders on June 11.

Among deals under consideration, Santander is trying to resurrect talks to combine its Sovereign unit, a retail bank in the U.S., with M&T Bank (MTB), also a regional American lender, after negotiations collapsed in May, three people familiar with the situation said last week. Joining the businesses would create a lender with about $140 billion in assets and 1,470 branches in the northeastern U.S.

The bank says it doesn't make purchases simply to expand its empire. "The strategic and financial criteria for acquisitions mean that Santander only carries out a transaction when it is sure it will create value for shareholders," says a Santander spokesman who declined to be identified, in keeping with company policy. "Santander is making bolt-on acquisitions in markets it knows, and that's exactly what a big and well-capitalized bank should be doing when there are opportunities," says Arturo de Frias, an analyst at Evolution Securities in London, who rates the bank a buy.

The bank also has taken steps to increase its market share at home. It added $36.6 billion in deposits this year by offering Spanish customers an annual interest rate of 4 percent, well above what competitors were paying. Banco Bilbao Vizcaya Argentaria, the country's second-largest bank, reported a 6.9 percent decline in its deposit base in Spain and Portugal in the first quarter. "Santander clearly took the view that [other banks] would chase this deposit funding and they would get in there first," says Claire Kane, an analyst at MF Global in London, who rates Santander a buy.

The bank hasn't been immune to investors' concerns about Spain's economy and finances: Its stock has dropped 27 percent since the beginning of the year. That may make it harder to finance acquisitions with equity, the currency it has used to buy banks, including the U.K.'s Abbey National in 2004.

As for Botín, there's no sign he'll be stepping aside anytime soon: He took over when his father resigned as chairman in 1986, at the age of 83. His eldest daughter, Ana Patricia Botín, 49, who runs Banco Español de Crédito, a Spanish consumer bank owned by Santander, has been mentioned as a possible successor.

The bottom line: Having avoided big losses on subprime debt, Banco Santander has the wherewithal to continue growing by acquisition.

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