On Emilio Botin and entrepreneurs in family-run banks

I had the pleasure of having breakfast with Emilio Botin, the chairman of the Spanish Grupo Santander, at his beautiful campus outside Madrid late last year. The meeting and my knowledge of his accomplishments helped me pen some of my thoughts on entrepreneurs as leaders in the banking industry, especially the ones I know in Asia.

Before I met him, I imagined that the achievements of Grupo Santander as a global financial institution in recent years should have made Botin an enigmatic, even regal, personality to behold. But he arrived at the appointed hour like a working man, excited to meet me, but in a hurry to get on with the order of the day. He was quite obviously a hands-on man, not afraid of the sweat in running the business like a 77 year old youngster.

A few minutes into the introductions, even as my fork was only just launching into the breakfast, he launched into a presentation that was memorable for its simplicity. He wanted to point out to me that Grupo Santander was now one of the largest financial institution in the world ($1.2 trillion in assets), and arguably the largest managed by a family. He also wanted me to know that its cost-to-income ratio was amongst the lowest in the international banks. 

As he was speaking, the faces of the entrepreneurs I considered as his contemporaries in Asia flashed across my mind. Wee Cho Yaw, chairman of UOB Group ($152b in assets) in Singapore. Teh Hong Piow, chairman of Public Bank in Malaysia ($78b). Quek Leng Chai, chairman of Hong Leong Group ($49b) in Malaysia. Jeffrey Koo, chairman of Chinatrust Bank ($64b) in Taiwan. Chartsiri Saphonopanich, chairman of Bangkok Bank ($66b), Thailand. Banthoon Lamsam, chairman of Kasikorn Bank ($54b), Thailand. Tessie Sy, chairman of Banco De Oro ($23b), in the Philippines. Arthur Ty, who runs Metrobank ($21b) for his family in the Philippines. Gigi Montinolla, CEO of  Bank of the Philippine Islands ($17b) and so on. They could all have said about the same things as he did, albeit in their own ways.

This immediately established my comfort level with Botin. But I was still in awe of him, because he was a fourth generation entrepreneur, when all the rest I knew were either only second or third at the very most. His was the largest entrepreneur run bank in the world, and theirs paled in comparison. I was in the company of the father of entrepreneurs in banking today, with more history and institutional memory to draw from to apply to his instinctive decision making skills, then anyone else alive, even if the values they espoused were similar.

The first theme that came across in our conversation was the fact that his bank was very liabilities focused, and so are the banks of all the entrepreneurs I know. There are many important things to say about a bank that focuses on deposits as the core of the business. Entrepreneurial families learn sooner rather than later that the banking business has to be close to the customer, which means a strong and low cost branch network built painstakingly over time, not easily replicable. The first thing that customers give you is deposits and that becomes a source of the cheapest funding in the marketplace. Globally retail banking delivers more than 80% of Santander’s profit.

Secondly, banks run by families tend to be more committed to shareholders than those run by governments or institutional investors. They pay the highest and most consistent dividends. The real reasons for this are due to a number of unrelated factors. Firstly, their core investor base is often people or institutions that are closest to them, including friends and family. Good dividends is a source of income, not just cost of capital. But another reason is defensive. As the bank grows, the closely held network of interested investors are a bulwark against hostile takeover bids by both governments and unfriendly investors – which happens all the time. The banks run by professional managers have shown in recent years to be more focused on paying themselves high risk-free salaries before paying shareholders.

Thirdly, entreprenuers manage their costs like scrooges, and the stories of their frugality are a plenty. Emilio Botin knows the cost of the golf balls his staff gave away as gifts. Wee Cho Yaw of UOB knows how often his senior executives use the office drivers outside of working hours. Malaysia’s Teh Hong Piow selected the chairs for his new office building personally. Banco Santander’s cost-to-income ratio in Spain is 47% and at the group level it is 44%, low for an international bank. It’s the kind of attention to detail that enables banks like Santander to be hugely profitable in places where others fail. Like the story of how Santander succeeded in Latin America at a time when the region was growing only 1-2 percent per annum in the early 1990s. Their employees are not amongst the highest paid, but they have access to a full set of benefits that not financial but equally important. Old money entrepreneurs tend to know that “sparing no cost” and “making every cent count,” are not necessarily contradictory to each other.

Fourthly, these entrepreneurs are skillful and boldly opportunistic, especially if they have had several generations to hone this skill. The story of the Botin family’s acquisitions of other financial institutions is told, not in decades, but in generational terms. Asian entrepreneurs like Wee Cho Yaw in Singapore, the Sy family in the Philippines and Quek Leng Chan in Malaysia have similar stories to tell, but their achievements in the M&A space are more recent, while the Santander story is told over four generations. Much of Asia is made up of new countries, established after colonialism ended.  The institutional memory that an Emilio Botin or any Asian entrepreneur can call on makes the so-called M&A expert in the investment banks look like children born just yesterday.

The 155 year old Santander story is an inspiration on how family managed banks can see beyond all the challenges facing them today. Past the awful regulators, past the regional integration that is to take place in 2015 and into an era when family run banks can indeed be amongst the largest banks in Asia, if not the world, one day.

The individual economies of Asian countries today are that much smaller than what Spain and the Eurozone represent. But there was a time when Spain itself was not just small, but provincial and insular. When we understand where Santander started from, and the hurdles it had to overcome, then we will realize that the more important question to ask is whether there are personalities in the industry today who have the vision, fortitude and the wiliness to stay the course regardless of the present challenges. 

The growth of Santander can be classified into three distinct periods, each with its own set of intrigues that it had to endure to get to the next level.  The bank was decreed into existence in 1857, ironically to promote trade, by the very controversial Queen Isabella II who was deposed in the Glorious Revolution a few short years later in 1868.  It was an historically extreme period of change in Spain that were not at all conducive to free enterprise as we know it today.

So for the bank to grow even outside its own province was difficult, to say the least. Only in the 1920s, and even then at a time when the country was fraught with regional antagonism and rising conservatism, that Emilio Botín y López, the current Emilio Botin’s grandfather, grew the bank’s branch network organically in the provinces. As owners of a banking licence, the Botin family was firmly established as what was then a merchant class clan, that could operate separately from the politics and ideological ferment of the day, but shaped by the circumstances surrounding them nonetheless.

I thought that the fact that the bank had a training school that started way back in the early 1900s gave a hint of the kind of approach the family was taking in institution-building. This in turn created employability in the local community and lifelong loyalty, a corporate culture that was at odds with the ideologies of the day. The corporate culture of the bank and the family, focused on the basic instincts of prudence, cost management and being close to the customer – at a time when the aristocratic classes were predisposed to extravagance – were also established during this time.

It was under Emilio Botín Sanz de Sautuola y López, the current Emilio Botin’s father, in the 1940s-1960s that the bank became prepared to undertake large-scale expansion outside of its immediate provinces. The rule of General Francisco Franco while deeply divisive, ironically also offered the opportunity to make several acquisitions of local banks. It was also during this time that the bank moved its headquarters to Madrid, then already the financial center of the country. On its hundredth anniversary, "Banco de Santander" as it was called then, had undertaken the short but arduous journey from the provinces to the capital city and managed to rank only the seventh largest finance house in a fast consolidating Spain – its global identity was still a long way away.

The second phase involved the bank’s expansion into Latin speaking countries. This international dimension was always present in the bank’s DNA from its inception, but not really activated until almost a century later. The bank was incorporated ostensibly to serve trade with Latin America, but by a queen whose own international track record was disastrous. The Spanish-American war, which ended with the country ceding many of its key colonies to the US and other powers, and the subsequent Spanish wars kept the focus still firmly domestic, although there would have been some international business despite the wars.

It was only in 1947 during the Franco years, that the bank actually ventured to open its first regional office in Havana in what is today, Cuba. This was followed by other acquisitions in Argentina, Mexico and Venezuela, and also an office in London. It was only in 1956 that the bank’s Latin American Department was set up. The fact that these developments took place under the Franco regime gave rise to public suspicion that there was collusion between the bank’s family and the ruling junta, a nagging suspicion that has not left the public domain to this day.

This was a family that was only too accustomed to being dragged into the controversies of the day. At the time of my meeting with him, the Spanish courts had accepted a complaint about their tax returns in 2005 and 2006. There was another discussion in the local newspapers on a burial site just outside the city for victims of murder during Franco’s Spain. Spain, unlike East Asia, broods on its long history on and on and on, even as the promise of a modern society beckons it into the future. In contrast, we in Asia do not hold our corporations to account for ancient crimes at all. If the Chinese wanted to remember the Opium Wars, HSBC and Standard Chartered Bank would not stand a chance to succeed as they do today.

The truth of this either way was not the narrative I was looking for. What is important is that the family demonstrated the uncanny ability in dealing with successive regimes, not as colluders, but as an independent merchant class, and lived to tell. This institution evolved to become a modern, corporate player in its own right. 

As I reflected on the parallels with the consolidations taking place amongst family owned banks in Asia today, the rough and tumbles to reach some scale is relatively benign today compared to Santander in its first 100 years. But the next phase, which propelled Santander into the international sphere is what differentiates this bank from all Asian family owned banks.

In my conversation with Botin that morning, I had the chance to ask him any question I wanted. The Eurozone’s Greek crisis, the Spanish economy, change in government and even charges against the bank, were all issues of the day. But I was not there to do an interview with him on these current issues. I was there to understand him better so that I could extrapolate the essence of the man, and what it takes to go where no other family-run banks has gone.

Quite clearly, it would take a lot to unravel a Botin.  But the logic and language our conversation corroborated to me that he was not a pretender. Pretenders hide behind huge egos, nebulous assertions and even charm. There was none of that in this conversation. When he was affected I could see it immediately, and when he was happy about the little things, that was obvious as well.

The bank’s first subsidiary in Latin America was set up in the 1960s, when the current Emilio Botín, whose full name is really Emilio Botin Sanz de Sautuola y García de los Ríos, joined the bank’s board. In 1967, he was appointed managing director of the bank and CEO in 1977. In that time, he did considerable internal work to strengthen the processes of the core business.  The 1970s and early 1980s saw the acquisition of banks in Puerto Rico and Chile that started the process of making it a commercial banking pioneer in Latin America. This again coincided with the Latin American sovereign debt crisis that affected several giants in the investment banking world at the time, but Santander kept its focus on commercial banking.

The third phase was a further set of consolidations within the Spanish banking sector to create the kind of scale without which it would have never been able for a Spanish bank to play in the Eurozone arena as it does today. This phase took place in the 1990s. Banco Santander acquired or merged with Banco Central Hispano (BCH), Banco Central and Banco Hispanoamericano. The behemoth became called Banco Santander Central Hispano, or BSCH, and finally established the bank as the largest in Spain.

In 1995, a second flurry of expansion opportunities came about for Santander in Latin America, when the larger US and European banks had left the region after the banking crisis of the 1980s. Santander developed its business in Argentina, Brazil, Colombia, Mexico, Peru, Venezuela and in Chile, Puerto Rico and Uruguay. All of this added to the retained earnings of the bank to be prepared for the opportunities in the Eurozone at the turn of the century.

Although by this time in the history of Spain, the country had become definitely an open and capitalistic economy, the propensity for intrigue had become ingrained in its society. The merger between Santander and BCH was examined extensively by the media and the regulators for conspiracies. When soon after the merger it became clear that there should be only one leader, Emilio Botín paid out the former BCH executives for a huge (by European standards) 164M severance pay, it attracted scrutiny that lasted several years. Botín was tried on "misappropriation of funds", but eventually acquitted in 2005. 

The fourth phase came about after scale had been achieved. Santander took part boldly in the Eurozone. In fact, at this point, Santander showed that it had the ability to identify, acquire and integrate national banks in other countries was far more astute than any run by professional managers alone. Much of the instinct for these decisions sat with Emilio Botin himself.

There was a time, after the 1997 crisis, when analysts and investors, did not like family owned or managed banks, because of the way family run banks in Asia responded to the crisis. Even much later in 2003, analyst reports wholeheartedly condemned family owned banks as secretive, parochial and unstable, and as the cause of the 1997 crisis through their interested party lending and so on. The central bank in Malaysia engineered the end of entrepreneur-run banks like that owned by Rashid Hussein in that country. Similar attempts were made in Singapore and Taiwan, all in the name of more “professionally run” banks.

But by 2008, the tide turned again. It became evident that the so-called professionally managed banks did not lack in their ability to throw up excesses of their own. Overleveraging and being rewarded for taking on risks, that the people who owned banks would never have, saw the demise of not a few so-called professionally managed banks.

By 2010, it became clear that tightly managed family owned banks were managed far more prudently and sustainably, than those that were managed by either the state or professional managers. The entrepreneurs were smarter now, and they understood risks at a more personal level. It was the period that gave the fillip for these family-managed banks like Santander to grow even more aggressively through the crisis to become the behemoths they have become in today’s world.

The operating principle was ownership of the risk inherent in banking. The entreprenuers always owned the risk, because it was at the end of the day, their own. But the ones that went under during periods of crisis under-estimated the sophisticated sources of some of these risks in today’s marketplace – currency exchange risk, interest rate risks, the risks that came from leveraged trades, purchasing toxic assets and so on. The professional managers failed because of a simple disconnect between the immediate profit for the bank and reward for themselves with the risks that surface in the long term for which they did not hold themselves accountable.

Against this background, if there is a flaw in entrepreneurs, it is that desire for more adventure. in 2004 what was then called Banco Santander Central Hispano (BSCH) acquired Abbey National in the UK – its first foray into the English speaking and developed world – an area that Emilio Botin could not call on the institutional memory of his forefathers. This foray promptly attracted considerable negative attention by the pompous British,  who loved intrigue themselves and had plenty of it from the Santander story. The British were also always surprised when someone else understood capitalism as well as they thought they did. They were intrigued that a business so commercial could arise from the ashes of what to them was a post-fascist country.

In 2008 Santander took over Alliance & Leicester and the savings business of Bradford & Bringley. All the UK banks were merged together under the Santander name, so that by 2010 it became the third largest bank in the UK. All in a few short years. To this day, the British press can't help but hiss when discussing the Spaniard owned bank in their midst.

By October 2008, BSCH had moved boldly in the US as well, which had a more benign attitude relative to the British. BSCH acquired a majority stake in Sovereign Bank, its first retail bank in the US. Together with a sub-prime auto finance business, the group has about $100billion in retail assets in the US today.

The boldest adventure of all took place in October 2007, when as part of a consortium that included the Royal Bank of Scotland and Fortis, Santander outbid Barclays to acquire ABN Amro, the Dutch bank that was floundering in controversies. The consortium broke up the bank, and Santander acquired ABN AMRO's subsidiary in Brazil, Banco Real, and its subsidiary in Italy, a Banca Antonveneta.

At about the same time, in August 2007, BSCH changed its name to Banco Santander and started the process of developing a new international identity that could carry it into the 21st century without the historical baggage of its origins or to the resentment it generated in the Eurozone. The identity is firmly a retail banking one, commensurate with a “We want to be your bank” (Queremos ser tu banco) advertising programme.

Longevity

The question of longevity of entrepreneur-owned banks is the final point I want to explore in this thesis. While the fourth generation Emilio Botin continues building on the energies of his great grandfather who started the bank in 1857, many Asian family banks today are languishing today, as the second and third generations loathe to take on the mettle and build on their parents legacies.

There are probably several reasons for the Botin family’s longevity in the industry. Understanding them will be instructive to extrapolating how family-managed banks in Asia might fare in the near future and which ones stand the best chance of building an Asian version of the Botin story.

The first reason is probably the fact that the Botin family operated in a difficult world for so long, from Spain’s painful transition as a chaotic monarchy into a modern democracy, that it has a very defensive mode as a family. So cohesiveness and continuity was important. The family became tied by clanship to a social class reinforced by vocation that was the banking industry in its time. It was this identity that protected the family from the social upheavals and changing regimes through several generations.

The children of modern day Chinese and other family owned banks in Asia are not trapped by this need to reinforce identity. The relative peace and prosperity of modern day Asia means that a scion of a banking magnate can walk out into the street to become a computer programmer and nobody would even blink an eye. Many have become computer programmers, fashion designers, movie makers and other professions that children of the very rich tend towards. A number of family run banks in Asia suffer from its children being forced to stay or go into the industry. The attempt of the Taiwanese Koo family to have its sons succeed in Chinatrust is a terrible case study.

Emilio Botin’s children, the great, great grandchildren of the founding Botin, are nominally still in the business. Daughter Ana Patricia Botin is CEO of Santander UK, and often cited as the possible successor of Emilio Botin. Son Javier is nominally a non-executive director of Santander’s property subsidiary.

But the fundamental shift may already be showing. The business itself is no longer a birthright. Ana Patricia is positioned more like a manager, with a professional degree and capable of being thrown out by investors if she fails. For the rest, there are any number of distractions anywhere in a more proletariat world.

The second reason is that the focus of the skills required to succeed in this business has shifted from building an empire to managing returns, more like an asset manager. In recent years, Santander has shed as many businesses as it has acquired and some quite ruthlessly, to keep focus on shareholder return.  In the past five years alone, it made several significant divestments and consolidations, such as selling Banca Antonveneta to an Italian bank and then its subsidiary, Interbanca to GE Commercial Finance. In return, it took over GE Money businesses in Europe, and GE's cards and auto financing businesses in the UK to be integrated to make Santander Consumer Finance larger. It most recently sold its Colombian bank to Corpbanca of Chile in December 2011. At the same time, the bank paid $2.5 billion cash to buy back its 24.5% stake in its Mexican subsidiary from Bank of America, and on and on and on. The next Emilio Botin may need to be less hands-on, and more strategic, than his forefathers.

In the final analysis, we forget that the key feature of an entrepreneurially run bank is the personality of the entrepreneur himself, sitting right there in the center of the business. It is the first line of sight we have on the long term sustainability of the institution. In this regard, Emilio Botin’s personality looms large. He is not a large man, but when he walks in your direction, you stand aside.

Botin’s personality, despite coming from an accomplished family that has every reason to rest on its laurels, is clearly driven, shrewd and passionate. His staff have many anecdotes about how driven he is, not just in work, but in any endeavor he takes – whether it is golf, horse riding or flying in his private jet. “He always wants to be the best,” was how one staff put it to me.

The shrewd aspect to his intellect came across even in my conversation with him. Botin had started the conversation by boldly telling me to ask any question I wanted. “Any question at all,” was what he said. I chose, for the most part, to focus on the essence of the man rather than on any number of the current controversies surrounding his business or the family.

But the one time I did come close to asking about the client investments that Santander made in Madoff’s Ponzi scheme, he skillfully avoided the topic about three questions before I got there. The mistake that Emilio Botin made in trusting Madoff was a profoundly expensive one, that exposed the banking group to about $2b in client funds. I could see how even a Botin could have fallen for the wiles of Madoff. He is a charming people person when he wants to be, and I imagine so was Madoff. In that way, he is both transparent and vulnerable.

The restitution that Santander structured for its customers to waive their claim against the bank, showed a shrewdness that only an Emilio Botin could have engineered. The bank offered non-cumulative preference shares to investors that equaled the losses incurred, and that paid a dividend when the bank wanted to. The issue was 'perpetual,' so the holder could not actually redeem the shares by selling them, but must leave them with the bank. So, it was solving potential damages and shoring up its own equity at the same time, all without dilution. The bank had to reserve only $600M for the entire $2b of losses covered by the offer, with a potential to recover more by taking over the recourse on the Madoff estate. Santander said that around 70% of affected customers accepted the bank's offer. No professional manager could have designed that.

There is still one aspect of an accomplished entrepreneur that I think very few professional managers will ever be able to demonstrate. Emilio Botin is a man of class in a way that a Peter Sands (Standard Chartered), Bob Diamond (Barclays) and Jaime Diamond (JP Morgan Chase) combined could not emulate. Even if they rode all the finest horses in the world, collected all the best paintings in the world or swirled all the best wines in the world in their crystal glasses, they would not be able to emulate the distinction with which an Emilio Botin enjoys these things as passionately as he does his trade. Compared to him, they come across as working class managers. They might even feign no time or interest in the finer things in life, while he lives them as naturally as he breathes.

Santander City, the 150 hectare headquarters campus opened in 2004 and where 6,800 people work today, is where I met with him. It boasts of lush greenery, environmentally friendly designer buildings, international sculptures, 1000 year old transplanted olive trees, a sports complex, a golf course, a wooded forest, a medical facility, a banking university and one of the best art collections in the world. By comparison, Asian tycoons still build their headquarters in the cities as soulless glass towers where people go to work and no more.

There is nothing like Santander City in Asia. Botin was inspired by the US Wachovia Bank’s campus in North Carolina, except that the European touch makes his campus outside Madrid just that more charming. I thought that all Asian banking entreprenuers should get invited to see this place and deconstruct their own impressions about what empire building is really all about.

The final aspect of any entrepreneur’s personality is Luck. While luck is not something possessed, it does favour the bold. The opportunities that came with the launch of the Eurozone could not have meant anything to Santander if Botin, his father, his grandfather and his great grandfather had not pushed along despite insurmountable odds in their respective periods without any view of the future. Some of the regulatory challenges faced by professional managers today pale in comparison to the blood and wars that put this business at risk in the course of Spanish and European history.

I asked Emilio Botin, “what next”. We talked about the bank’s ambitions for Asia. He did not have a plan just yet, except to say that it is turning representative offices in Singapore and Tokyo into subsidiaries and to grow in China. I think that some acquisition opportunities will come for Santander in the same way as its acquisitions in Poland and some Latin American countries came about. Very specific institutions that his instincts tells him will work.

But for this to happen, he needs to be prowling around in the region, and making up his own mind about what would work and what would not. At his tender age, he can only start the process, but completion will be based on quite another timeline. That, in generational terms, will be another story.

 

 


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