We talk to Steve Pateman about Santander’s acquisitions of Abbey, Alliance & Leicester and Bradford & Bingley in the UK and discuss how Santander has responded to the challenges and opportunities brought by the financial crisis. We also explore the concept of relationship banking and the importance of trust in customer/bank relationships.
Steve Pateman
Head of UK Corporate & Commercial Banking
Steve Pateman is Head of UK Corporate & Commercial Banking for Santander Corporate Banking. He has been involved in investment, corporate, commercial and business banking for over 25 years. Steve previously worked for NatWest and RBS where he was CEO of Business Banking, Managing Director (Commercial Banking) and Managing Director (Corporate Banking). Steve has also worked on a variety of financings, restructurings, capital market and equity issues. He has experience of running businesses with profit and loss in excess of £1 billion with over 5,000 staff.
Could you give me an overview of the Santander Group and its banking strategy?
Santander is one of the top ten of the world’s best capitalised banks. Our core businesses are in Iberia, UK and America. In the UK we acquired Abbey in 2004, and Alliance & Leicester and Bradford & Bingley in 2008. Across Spain, Brazil and the UK we have approximately 60% of the group’s businesses. We also acquired Sovereign in the US last year.
Santander is focused on retail and commercial banking. It has a significant corporate banking business, and a very strong global markets business, but at its heart, it is a retail and commercial bank. Acquiring Abbey was really about extending the successful retail and commercial business that Santander had in Iberia into the UK.
What has been your strategy with Abbey and the other UK acquisitions?
In 2004, Abbey was a bank in probably not the best of shapes. It had a significant portfolio of under-performing wholesale assets but was very much the old building society business focused around savings and mortgages. The original focus of Santander was tidying up that business and putting it on a very sound platform. The strategy really started to come through in Abbey’s performance in 2007 and 2008.
When Abbey was acquired by Santander, its cost/income ratio was roughly 70% and last year it was close to 40%, which gives you an idea of the efficiencies we put in place. We installed the Partenon system, Santander’s main operating system, which allows staff to see everything customers do with the bank and process requirements on-line.
Santander’s attention in the UK turned to corporate and commercial aspirations towards the end of 2007. The strategy was to diversify away from larger corporate transactions into a more distributed corporate and commercial banking business that effectively picked up the UK mid-market – where we could be a more meaningful banking partner. We wanted to continue building on Abbey’s real estate and social housing businesses, but also to create a regional business footprint.
Acquiring Alliance & Leicester last year allowed us to accelerate our plans by two to three years as Alliance & Leicester already had a regional business network. What that acquisition gave us was the infrastructure to start to compete with other UK banks.
Our focus then was on what we thought customers really wanted, which was to have a relationship with their bank where their bank understands them, works with them, maintains a consistent level of support and can be relied upon. We focused on building relationships with businesses rather than trying to work out how many products we could sell them. Our stance was to have a much more old fashioned approach to relationship banking.
What has happened over the last 18 months has created a real opportunity to do that. The market wants an alternative to what it has seen over the last 10-15 years and is increasingly comfortable and indeed keen on the dual banking model. That sits well with us because in Spain, even the smallest business will have two or three banking relationships – that is the culture and the environment. In the UK we are now seeing a trend towards companies wanting to have two or three banking relationships so that they are not dependant on one particular organisation.
How well positioned was Santander to withstand the financial crisis?
Santander is regulated by the Bank of Spain, which has taken a more conservative view in the way it regulates its banks. In the good times, Spanish banks set aside more than their UK counterparts which meant that when the bad times came, they had very good reserves that they could draw on. Santander has got a very strong balance sheet, which was strengthened by the rights issue last year.
“In the good times, Spanish banks set aside more than their UK counterparts which meant that when the bad times came, they had very good reserves that they could draw on.”
Our philosophy is about building relationships with clients and taking sensible risks. This is not about going out and generating as much income as you can and then living with the consequences. This is about generating quality, sustainable revenue from relationships. At Santander, we do not talk about deals – we talk about relationships. Transactions are part of the relationship; they are not done in isolation.
What challenges and opportunities has the crisis brought for corporate banking and Santander in particular?
A decent sized corporate in the UK traditionally had access to 15 or 20 banks, which is now down to six or seven due to the recent consolidation in the market. Consequently, there is a need to rethink how you manage those banking relationships and effectively, what your capital structure is. There is money out there, but not as much of it. Instead of supply outstripping demand by a multiple, as it did before the crisis when UK corporates had access to a wall of cash, supply and demand are not far off achieving a balance. That changes the whole dynamics of the market.
When the supply of credit outstrips demand and the price goes down to a point where it is uneconomic, what happens is what we have seen – banks end up being unable to build the level of reserves and capital that are needed to sustain their businesses for a down cycle and they have to react in a very volatile way, by pulling credit and pulling capacity, which has a negative impact on the economy. You cannot have low pricing and low volatility – if you get low pricing, you are going to have high volatility at some point, so there is a trade-off between risk, return and volatility.
The sensible way to do business would be to balance risk, return and volatility. I think that many companies would much rather have a market where there was sensible pricing, sensible risk parameters and very low volatility so that they can plan and manage their businesses in a relatively safe environment. There is an opportunity to create an organisation which is competitive and sensible in terms of risk. It is entirely reasonable to say to a company, we are willing to invest capital in you but this is the basis on which we invest it.
“The sensible way to do business would be to balance risk, return and volatility. I think that many companies would much rather have a market where there was sensible pricing, sensible risk parameters and very low volatility so that they can plan and manage their businesses in a relatively safe environment.”
What is the importance of trust in the current market and what are the implications for the banking industry?
A bank is presented with a business plan by a customer and has to decide if that is a plan it is prepared to back. That creates an element of trust between the bank and the customer. The customer trusts the bank to maintain its support and to work with the customer, should things not go according to plan, and the bank needs to trust the customer to do what he said he was going to do.
Trust is a fundamental part of a bank relationship. There needs to be communication, dialogue, understanding and a common sense of purpose about trying to work together. That has to be the successful foundation upon which the banking industry can build and go forward.
For instance, let’s say that a business which has done a good job, has been with a bank for a number of years and has always done what it said it would do, encounters a small problem. In the past that has been dealt with by a simple exchange of correspondence or dialogue but now it is seen as an opportunity to restructure the debt, often on draconian terms that can create a crisis. When that happens to you, or someone you know, then your trust in the banking industry breaks down. Trust must be rebuilt, otherwise it will be harder for businesses to make the investments and long-term commitment that they need to make. You cannot expect businesses to plan for the long term and employ people if they aren’t confident about their ability to fund that growth and investment.
Where do you start rebuilding that trust?
Understand a customer’s business and from that you will be able to develop a relationship. Say to the customer, “Talk to me about your business and what you want to achieve.” That is a good starting point. If you go in and say, “This week’s special offer is one of these,” you are the same as everyone else.
We want to be different because we think it is fundamentally important to the business that we want to develop, in terms of being a long-term player that allows us to generate capital that we can reinvest. But if we don’t understand our customers and we don’t understand their businesses, we will fail in our aspirations.
How are customers’ needs evolving in the current market?
Customers are having to adapt to the fact that there is less banking capital and less liquidity out there. I spend a lot of time talking to treasurers who say that they have so many millions of pounds of debt and want to know what they should be doing about their capital and balance sheet. We talk to them about their indigenous UK business, which can probably sustain two to four banking relationships and raise a certain amount from the UK market. Then they can think about institutional investors, capital markets and other ways to bridge the gap.
Customers are saying they haven’t got enough business to keep 24 banks happy, only to keep six banks happy, and the gap will have to be filled from other sources. That is a trend that is very much going to continue. We will see a change in the way businesses are funded, a change in terms of leverage and price. We are probably in for a more conservative environment in terms of capital structures and I don’t think that is a bad thing. Customers are also focused on their suppliers and the question of how the suppliers are able to continue to sustain their businesses – much more so than in the past.
“Customers are saying they haven’t got enough business to keep 24 banks happy, only to keep six banks happy, and the gap will have to be filled from other sources. That is a trend that is very much going to continue. We will see a change in the way businesses are funded, a change in terms of leverage and price.”
How important are customer relationships and how do you support your customers in the long term?
Relationship management is probably somewhat tarnished so when you start to talk about it, it is likely that people will raise an eyebrow. We have to be very clear that we practice what we preach, which is working with our customers to understand and develop their business and providing solutions that meet their needs.
That approach creates a much less volatile environment and a much less volatile banking relationship. It makes a better environment in which businesses can invest and grow and in which banks can prosper. We are seeking to develop long-term relationships, but you can only do that if you take the time to understand the customers and price capital in a way that reflects the fact that you are making an investment in their business.
If you get those fundamentals right, then you can have long-term relationship banking – but if you don’t get them right, we should tear up the words ‘relationship banking’ and accept that capital is a transactional commodity.
