Santander Surprise CEO Marin Bids for Investor Trust

Banco Santander SA Chairman Emilio Botin judged Javier Marin ready to run Spain’s largest bank. Now Marin has to prove himself to investors.

The 46-year-old chief executive officer tomorrow will present his first quarterly earnings report since taking over in April, giving shareholders their closest look yet at how he plans to shore up Santander’s capital and stock price.

In picking Marin to replace Alfredo Saenz, Botin, 78, chose a former personal assistant without experience running one of the front-line retail divisions at a lender with 1.3 trillion euros ($1.7 trillion) of assets in markets from Brazil to the U.K. and Spain. Three months after Marin was promoted, some investors are still trying to make sense of Botin’s choice.

“I’m not sure that I can understand the logic of appointing a young man to head such a complex enterprise,” said Inigo Lecubarri, who helps manage more than $500 million at Abaco Financials Fund in London. “This is a 46-year-old individual who hasn’t had a lot of management experience in areas that really matter or that are at the heart and core of Santander’s business.”

Marin, who joined the bank 22 years ago, contributed 3.6 percent of its 2012 gross income in his latest job running private banking, insurance and asset management, about the same as the combined contribution of Santander units in Argentina and Puerto Rico. He oversaw 1.7 percent of the company’s staff.

“He does not have a demonstrable track record in commercial banking,” said Matthew Williams, a Paris-based analyst at Carmignac Gestion, which has 55 billion euros under management, including Santander bonds and stock.

New Generation

Since being named CEO, Marin has appointed younger executives to positions of influence and realigned management to take advantage of cost savings in areas such as technology.

Marin’s first transaction as CEO was the sale of half of Santander’s asset-management unit to Warburg Pincus LLC and General Atlantic LLC in May. Before that, he led a number of other deals that generated capital gains for the bank as it weathered Spain’s economic crisis, as well as investor concern that the lender is selling valuable businesses.

“Maybe those who were surprised by his appointment will want to reserve judgment until they’ve seen Marin in action,” Simon Maughan, head of research at Olivetree Financial Group in London, said in a phone interview. “Most people think Botin is a pretty good judge.”

‘Excellent Preparation’

Neither Marin nor Botin would comment for this article, and Marin hasn’t spoken publicly since his appointment.

“His experience as the head of three global divisions within Santander means he has worked with customers and products in every one of the group’s key markets, a unique and excellent preparation to be CEO,” the bank said in a statement in response to questions.

Marin’s first task will be to answer doubts about loan losses and capital levels as the bank struggles with a Spanish economic slump now in its sixth year and sluggish growth in markets such as Brazil, said Andrea Williams, who manages about $1.7 billion in European shares excluding U.K. stocks at Royal London Asset Management. Profit and revenue have dropped at Banco Santander Brasil SA, Santander’s biggest-earning unit, whose shares have declined 42 percent since a 2009 initial public offering.

Capital Ratios

Santander’s capital ratios under Basel III criteria remain too low, and the bank may have a 10.3 billion-euro shortfall that could be plugged through asset sales, a dividend cut or by issuing new shares, Jaime Becerril, an analyst at JPMorgan Chase & Co. in London, said in a June 13 report.

The Spanish lender will have a core capital ratio of 8 percent at the end of this year if Basel III rules were fully imposed, Botin told shareholders in March. That compares with the 10 percent ratio reached at the end of March by BNP Paribas SA, France’s biggest bank, and the 9.6 percent achieved by Frankfurt-based Deutsche Bank AG at the end of April after selling almost 3 billion euros of shares.

Investors will be watching to see if Marin responds to a Bank of Spain order to lenders in June that their dividend distributions in 2013 “be limited,” said Neil Smith, an analyst at Bankhaus Lampe in Bielefeld, Germany.

The regulator also said that banks that pay dividends with shares should adjust total payments to bring them in line with the growth of outstanding shares and earnings performance. Santander currently pays out 60 cents a share, with most investors taking the payment in stock.

Capital Question

“The big question for Marin is the capital that’s required and does Santander have enough,” Williams said. “Other issues are when are we going to get some comfort on nonperforming loans and what are the trends in Brazil and Latin America?”

The Basel III measures will more than triple the core capital that lenders must hold to at least 7 percent of their assets, weighted for risk, by 2019. Systemically important financial firms, such as Santander, will need to maintain a buffer above that level.

Santander reported an additional 3.8 billion euros in net new bad loans in the first quarter, taking the total to 38 billion euros as defaults in markets including Spain and Brazil continued to rise. Bad loans as a proportion of total lending for the group were 4.76 percent in March, 6.9 percent at its Brazilian bank and 56 percent at a unit set up to manage 12 billion euros of assets linked to Spanish real estate.

Share Decline

Santander closed little changed at 5.45 euros in Madrid trading. The bank’s shares have fallen 11 percent this year, compared with an 8.4 percent gain for the Bloomberg Europe Banks and Financial Services Index. The shares are down 2 percent since Marin’s appointment was announced April 29. Ten of 40 analysts recommend clients buy the shares, according to data compiled by Bloomberg.

Second-quarter net income, due to be reported tomorrow, may jump to 1.1 billion euros from a restated 123 million euros a year earlier, when the bank took one-time charges to help clean up its real estate loan book, according to the average estimate in a Bloomberg survey of six analysts.

Born in Madrid and a law graduate of Comillas Pontifical University, Marin joined Santander’s legal department in 1991. Botin named him his personal secretary in 1995, and he held the post for four years as the bank expanded in Latin America and acquired Banco Central Hispano SA, Spain’s third-biggest lender, in a 10 billion-euro stock swap.

Private Banking

Marin ran Santander’s Spanish private-banking unit Banif from 2001 to 2007 before being named to head the global private-banking business, a division that had invested clients’ money in funds linked to the Ponzi scheme run by Bernard Madoff. He added asset management to his responsibilities in 2009 and insurance in 2010.

The son of a chemist and a father of three, Marin shares a love of golf with Botin, who built an 18-hole course at the bank’s headquarters outside Madrid. Marin’s capacity for working long hours as the chairman’s aide and a passion for golf helped seal their close relationship, said two former colleagues who asked not to be identified because they didn’t want to jeopardize their relationship with Marin.

In 2012, Marin played in the Zurich Classic in New Orleans, teeing off as an amateur opposite Colombian professional Camilo Villegas, according to the event’s website. He had a six handicap in June 2012 compared with the 11 last reported by Botin in 2006, the Royal Spanish Golf Federation website shows.

Family Affair

A career in Botin’s bank is a family affair for the Marins. A brother, Rafael, also was on Botin’s personal staff and worked for Marin in private banking, asset management and insurance. One sister, Maria del Carmen, is employed at Santander’s wholesale bank, while another, Marta, had a job at Banco Espanol de Credito SA, the consumer lender known as Banesto that was absorbed by Santander this year. All declined to comment, a spokeswoman said.

Santander earned 592 million euros from the businesses run by Marin in 2012, or 2.5 percent of the company’s net operating income, compared with 745 million euros, or 3.1 percent, in

2010. Profit from global private banking, the business on which he built his career, fell to 209 million euros last year, less than 1 percent of pre-provision profit, from 330 million euros, or 1.4 percent, in 2009.

Asset Sales

Santander has been selling businesses run by Marin, including control of its insurance operations in five Latin American countries in 2011, as it absorbs loan losses in Spain.

The deal in May to sell half of its asset-management division valued the unit at 2.05 billion euros and yielded a 700 million-euro capital gain for the bank. Transactions led by Marin have generated 3 billion euros in capital gains for Santander, said a bank spokesman, who asked not to be named in line with company policy.

“They will argue that there is a strategic element to many of these disposals, but in general I would say it’s been done to boost capital, and the bank’s business is shrinking as a result,” Benjie Creelan-Sandford, an analyst at Macquarie Bank Ltd. in London, said in a phone interview.

Others said the transactions that Marin has carried out give an insight into his worth to the bank.

“Selling bank assets is actually a very hard thing to do well, and in Santander’s case it may have been a very good skill to have just recently,” Peter Hahn, a finance lecturer at London’s Cass Business School, said in an interview.

Marin’s promotion places more power in the hands of Botin, whose family, which owns 1.8 percent of Santander’s shares, has helped run the bank for almost 120 years.

Saenz Departure

A wealthy and influential figure in his own right, Saenz, 70, acted as a counterweight to Botin on Santander’s board in a way that Marin can’t replicate, said Lecubarri of Abaco Financials. Saenz, Santander’s CEO for 11 years, quit in April after a 19-year legal battle over his role in a loan-recovery case while head of Banesto, which had led to him being convicted of making false accusations in 2009.

“Saenz was not only a very seasoned and respected retail banker but also a good counterpoint to Botin in terms of capacities, seniority and leadership and completely free of financial and career constraints,” Lecubarri said. “Having Alfredo around as someone that could stand up to him was useful for corporate governance.”

Marin Appointments

One of Marin’s first moves was to create a global consumer-banking unit led by Javier San Felix, 45, that the bank said will seek to wring out cost savings, and a new division for human resources, organization and costs. After also naming new heads of risk management and internal audit, Santander this month appointed Roman Blanco, 48, as its new country head for the U.S., where it owns Boston-based Sovereign Bank and Santander Consumer USA, which specializes in auto loans.

Marin “has to develop his own culture, and he has to know who he will trust,” said Ingo Speich, a fund manager at Union Investment GmbH in Frankfurt, which has about 200 billion euros under management, including Santander shares.

As head of global private banking, Marin had to clear up disputes with clients facing losses from products linked to Madoff. In December 2008, Santander said 2.33 billion euros of its clients’ funds were at risk in the Madoff fraud.

Santander offered a settlement to private-banking clients through preferred shares paying 2 percent and giving the company the option to buy them back after 10 years, the lender said at the time. Santander’s perpetual junior subordinated debt issued in 2004 was then yielding more than 12 percent.

Madoff Settlement

Santander booked a net charge of 450 million euros against 2008 earnings to cover the Madoff compensation and a similar deal for Banif customers hit by losses on products tied to Lehman Brothers Holdings Inc., including bonds that guaranteed the investor’s principal and paid interest linked to other securities. Banif’s 2009 annual report listed charges of 220 million euros for the settlement of Lehman claims and 16 million euros for Madoff.

Marin boosted profit at Banif as he extended its network. Net income doubled to 55.5 million euros during his tenure as income from fees jumped to 151 million euros in 2007 from 79 million euros in 2001.

The increase in revenue was partly the result of the sale of products that later lost money for customers, said Fernando Zunzunegui, a lawyer who negotiated settlements for clients who invested through Lehman Brothers and Iceland’s Kaupthing Bank Hf, which failed in 2008, sending the nation’s economy into its worst recession in six decades. Those products were sold from 2005 to 2007, a period when Marin was in charge at Banif, Zunzunegui said in a phone interview.

‘Wisely Done’

Santander was most active in investing in Madoff-linked funds in Argentina around 2000, said Osvaldo Prato, a lawyer at Arazi, Prato, Mariani de Vidal Merola & Asociados in Buenos Aires, which still represents some Santander clients who didn’t accept the settlement. That was before Marin took on his international private-banking role.

Saenz, the former CEO, said in 2009 that “practically 100 percent of the energies, resources and the time” of Marin’s private-banking staff in Latin America had been devoted to resolving the Madoff affair, causing the unit’s profit from the region to dip in 2009.

The effort led by Marin to resolve Madoff complaints did bear some fruit.

“With the passage of time, I have to come to the conclusion that Marin managed the Madoff situation well and rapidly,” said Guillermo Tixi, a partner at Tixi, Ricciardi & Romero Abogados, a Buenos Aires law firm that negotiated settlements for Santander private-banking clients in Argentina. “It was wisely done.”

Bankers Departed

Marin owns 278,718 Santander shares, valued at 1.5 million euros at today’s prices, according to a company filing. Saenz earned 8.24 million euros in his final year as CEO and retired with an 88 million-euro pension. The bank declined to comment on Marin’s compensation.

His appointment follows a period in which a number of Santander’s most-experienced bankers departed, starting with U.K. divisional head Antonio Horta-Osorio in 2010 and Latin American chief Francisco Luzon in 2012.

His elevation is part of a transition being engineered by the Botin family, said Mauro Guillen, who published a history of the bank in 2007.

The process will probably end with Ana Patricia Botin, 52, the chairman’s eldest child who heads Santander’s U.K. division, succeeding her father as chairman, he said. Emilio Botin took on the top executive role at the bank in 1986 at age 52 when his father stepped down at 83.

Transition Underway

“A transition is under way that’s as inevitable as counting the passing years,” said Guillen, a professor of management and international relations at the Wharton School of the University of Pennsylvania in Philadelphia.

Investors will be watching to see how the bank performs as they test the new CEO and the judgment of Botin, now in the twilight of his 27-year chairmanship. If Botin surprised anyone with his choice of Marin as CEO, that was true to form, according to Lecubarri of Abaco Financials.

“Botin is always springing surprises,” he said. “He can think outside the box, or least see things from a different perspective.”

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