WorldCity Business Magazine

(3) Banking – Sigue la reconquista

by Antonio Garrastazu and Jerry Haar

Spains banks continue their expansion throughout the Americas, South Florida included

Spains reconquista of the Americas this time with a checkbook rather than a sword continues unabated. For more than a decade now, Spanish firms across a myriad of industries have planted their flag in the western hemisphere in search of customers, natural resources, and know-how.

Perhaps no sector has made its presence (and profitability) felt as great as financial services. From 1995 to 2000 Spanish financial institutions experienced an unprecedented expansion into the region. Spanish colonial connections, immigration flows, cultural understanding and a language commonality boosted Spains competitive advantage in Latin America since the first explorations. Steady growth within Latin America has complemented Spains historical ties and strong banking practices, setting a foundation to promote continued finance, trade, and economic growth within the region.

As Spains economy merged with its European Union neighbors, banks were integrated into a mature, saturated market. Therefore, higher margins and faster growth rates in Latin America prompted expansion. Spanish strategies magnify the advantages of economies of scale and foster the creation of bigger companies in various countries. Because of these economies of scales, retail banking increases their client base, as well as providing diversification. By using Latin America and the Caribbean for diversification, the banking sector creates added internal stability, as well as stability in the regional economy, because both regions economic cycles often show a negative relationship.

The potential of large Latin/American markets are obvious when looking at economic statistics and regional demographics. European markets actually have negative population growth, compared to Latin America which was expected to increase by an estimated 12.6 percent between 2005 and 2010 according to the Economic Commission for Latin America and the Caribbean. By 2050 Latin America and the Caribbean will be a market of 700 million people, compared to a European market of 330 million.

It is not surprising then that Spanish financial institutions are presently conducting business in every country in the region. A key to their success is that Spanish banks introduced their management practices and new products, like lottery-linked accounts and fast-approval mortgages. When introducing new banking practices in a region it is important to gain market share in significant numbers. This stresses the importance of Spanish expansion in the Americas via acquisition compared to growing from scratch. Spanish banks commonly kept their banks in Latin America and the Caribbean as subsidiaries, rather than branches of the parent, which are typically used solely for wholesale and corporate banking activities. Spanish banks used these
subsidiaries as vehicles for entry into retail banking.

For example, in 2000 Banco Santander, Spains largest Bank, bought Brazils Banespa, for $4.8 billion. In addition to Banespa, Santander purchased Grupo Serfn in Mexico and Banco Santiago in Chile to consolidate the groups position as the leading financial franchise in Latin America. Santander is also part of a larger group of banks offering $100 billion for ABN Amro, with Santander aiming to acquire ABNs Brazilian unit. If successful, this acquisition would effectively double the banks size in Latin Americas largest economy.

Additionally, there have been two recent cases of Spanish banks acquiring local Miami banks, demonstrating interest in the U.S and Florida and the U.S. Banco Popular Espaol acquired Totalbank in July 2007 and Banco Sabadell purchased Transatlantic Bank in April of this year. The winning strategies of these Spanish-owned banks are to enter the Latin American market via Florida.

In the intense competition between the largest Spanish banks, Santander and Banco Bilbao Vizcaya Argentaria (BBV) used different strategies for expansion. For example, Santander gained majority stakes. They had a strong capital base, with prior investment banking knowledge and a strong leadership style. BBV differed in the fact that they often gained only minority shares and expanded gradually. Foreign banks have the opportunity to break into the foreign retail market when incumbent banks are not competitive and the region has a fast growing market. Before the Spanish banking expansion, Latin American government banks averaged a 30 percent share in the banking system assets. Government-owned banks often created high prices and, as a result, domestic banks enjoyed a lack of competitive pricing.

With the implementation of neo-liberal economic reforms, including the liberalization of financial services, foreign banks have flocked to Latin America and the Caribbean. As long as foreign banks experience higher average loan growth, higher average provision expenses and greater
loss-absorption capacity, Spanish banks in particular will continue to serve as the biggest supplier of funds into the region.

Not only are Spanish banks now the largest in the region, they also demonstrate a continuous commitment, weathering the storms of periodic economic downturns. Given the fact that Spanish multinational companies such as telecommunication giant Telefnica, oil company Repsol, as well as energy producers Endesa and Union Fenosa an important client base of Spanish financial institutions are expanding their presence in the Americas as well, the outlook for Spanish banks in the region is a very bright one, indeed.

Antonio Garrastazu is executive director of the Spain-U.S. Chamber of Commerce (Florida). Jerry Haar is a professor in the College of Business Administration at Florida international University.