Regulation Is Holding Back Europe’s Banks, Santander’s Botín Says

Key Concepts

• Profitability Targets: Banco Santander aims for 16.5% profitability in 2025.
• Shareholder Value: Significant increase in dividend per share and a 100% rise in share price, with potential for further value creation.
• Valuation Multiples: Santander's price-to-earnings ratio is under 10, considered attractive compared to US banks, and the bank believes it deserves a premium due to improving profitability and growth.
• Single Open Financial Services Platform: The core strategic vision to integrate disparate banking units into a unified platform.
• Diversification: A global presence across Spain, Europe, UK, US, Mexico, and Brazil, providing scale and resilience.
• Efficiency Gains: Reduction in cost per transaction by one-third through systems like Gravity Alco and payments core.
• Auto Lending: A strong vertical with a significant presence at dealerships and through Open Bank.
• Delinquency Rates: US auto loan delinquencies have normalized post-COVID, with stable loss rates and consumers catching up on payments.
• Interest Rate Environment: Moderate interest rates (around 2-3%) are seen as beneficial for banks, supporting margin and growth.
• European vs. US Regulation: Significant disparity in the volume of banking regulations, with Europe having substantially more rules.
• Capital Ratios: The argument that bank soundness depends on more than just capital ratios, including balance sheet strength, liquidity, scale, and business model.
• Taxation in Europe: High effective tax rates on bank profits in Europe (58 cents per euro) compared to the US (42 cents per dollar).
• Capital Markets Union: The ongoing effort to create a more integrated European capital market.
• SME Lending: The critical role of banks in providing lending to small and medium-sized enterprises.
• Unified Banking Regulatory System: The long-term, slow progress towards a single regulatory framework in Europe.

Banco Santander's Strong Performance and Strategic Vision

Banco Santander has experienced a highly successful year, with financial results on track to meet its three-year plan targets. The bank anticipates reaching 16.5% profitability in 2025. This success has translated into significant value creation for shareholders, evidenced by an increasing dividend per share and a 100% rise in its share price. The bank believes its stock still holds considerable inherent value, with attractive multiples compared to US banks, trading at just under ten times price earnings. Santander argues it deserves a premium over European and even US banks due to its improving profitability and growth prospects.

Drivers of Success: A Decade of Transformation

The success of the past year is attributed to a decade-long strategic vision initiated by the current leadership. Upon taking over, the group was characterized by a collection of disconnected banks operating with different geographies and business models. The overarching goal has been to unify these entities under a single open financial services platform. This year marks a significant milestone, with all five of Santander's businesses demonstrating growth. The organization has been simplified through strategic divestments and acquisitions, notably the sale of its Polish unit and the acquisition in the UK, which has now reached a significant scale. This strategic repositioning is expected to drive profitable growth for many years to come.

Strategic Transactions: Selling Poland, Buying the UK

Santander successfully divested half of its Polish unit, a transaction described as the largest cross-border M&A in Europe in a decade. This achievement stands in contrast to other European banks, such as UniCredit and BBVA, which faced difficulties completing similar deals. The key to Santander's success in the Poland sale is attributed to pursuing friendly deals, acknowledging the current global trend of governments defending national interests and the prevailing regulatory environment.

Diversification and Scale: A Global Footprint

Banco Santander's extensive geographical diversification, spanning Spain, Europe, the UK, the US, Mexico, and Brazil, is a significant asset in today's economy. The bank emphasizes that in the current landscape, entities must either possess global scale or be highly specialized. Santander boasts global scale, serving 180 million customers, a number exceeding the top two banks in many US states. Over the past ten years, the bank has added 60 million customers, leveraging this scale to achieve operating leverage by working across the entire organization rather than in silos.

Efficiency and Technological Advancement

A core objective for Santander has been increasing operational efficiency. The bank is described as "scratching the surface" of its potential in this area. Key technological enablers include the Gravity Alco operating system and its payments core system, which have collectively reduced the cost per transaction by one-third over the last two years. The next phase of customer-facing innovation will be the open bank front-end. The bank anticipates flat to down costs with a growing topline in the coming years, driven by its presence in large end markets (1.2 to 1.3 billion people) where it operates at scale. The development of proprietary platforms is highlighted as a rare and valuable asset.

Auto Lending: A Strong Vertical

Santander's auto lending business is identified as one of its strongest verticals. The bank partners with dealerships at 14,000 points of sale and also operates through its digital platform, Open Bank. While delinquencies have normalized after being very low during COVID-19, the final loss rate has remained stable over the past 12 months. Notably, consumers are actively catching up on their loans, even if they fall slightly behind. This indicates a solid US consumer market, with no current signs of widespread issues.

The Impact of Interest Rates on Banking

The current interest rate environment is viewed favorably by Santander. The bank anticipates terminal rates in Europe to remain below 2% and in the US below 3%, driven by factors such as government debt, demographics, defense spending, and decarbonization. These levels are considered optimal for banks, providing a healthy margin without excessively deteriorating credit quality. This environment is expected to support global growth rates of around 3%.

Regulatory Landscape: Europe vs. United States

A significant disparity exists between banking regulation in Europe and the United States. Over the last six years, the EU has introduced approximately 13,000 new banking rules, while the US has implemented only 3,500. Santander advocates for smart regulation and believes that Europe has gone too far in certain areas, particularly concerning capital requirements. The bank argues that bank soundness is a function of multiple factors beyond capital ratios, including a strong balance sheet, liquidity, scale, and a robust business model. Santander's own CD ratios are cited as among the best globally, including those of top US banks. The focus, according to Santander, should now shift towards supporting growth rather than solely on capital accumulation.

The Draghi Report and European Growth Ambitions

The Mario Draghi report on European economic growth is mentioned, with Santander expressing high ambition for its execution. While acknowledging that not all recommendations may be fully implemented, significant progress is expected. The bank highlights that only about 10% of the report's recommendations have been executed in a single year, underscoring the need for greater ambition in delivering on these proposals.

Taxation and its Impact on Investment

Santander points to high taxation as a significant impediment to growth in Europe. The bank states that for every euro earned in Europe, 58 cents go to the government, compared to 42 cents for every dollar earned in the US. This "excess regulation, excess taxation" is viewed as a tax on the economy, discouraging investment and leading to a divergence between Europe and the United States.

Member State Regulations and Regulatory Complexity

The existence of both European-level and member state-level banking regulations creates additional complexity. The transcript highlights the sheer volume of financial services regulation in Europe, with an estimated 97,000 lines of text when considering all interpretations and national rules. This multi-layered regulatory framework, in addition to the core European rules, presents a significant challenge.

Capital Allocation and Regulatory Differences

The relative differences in regulatory levels significantly influence capital allocation decisions. If other factors are equal, the higher tax burden in Europe (58% of profit to the state) makes it less attractive for capital investment compared to the US (42% of profit to the state). Therefore, Europe would need to offer higher growth or profitability, or both, to attract equivalent capital.

Capital Markets Union and SME Lending

Santander has been a proponent of a Capital Markets Union in Europe. While the recent "savings union" is not a direct substitute, it is seen as a helpful step. The reality is that most commercial lending to small and medium-sized companies (SMEs) originates from banks. This makes it "existential and urgent" to increase ambition for change, as enhanced competitiveness relies on increased investment, much of which is facilitated by bank lending. Expanding the capacity of banks to lend is therefore crucial, and smart regulation would be instrumental in achieving this.

The Long Road to a Unified European Banking System

The prospect of a unified banking regulatory system in Europe is discussed, with the analogy of building the United States in 200 years versus Europe's 50-60 years of progress. While acknowledging that it will eventually happen, the speaker expresses uncertainty about whether they will witness its full realization.