January 25, 2013 7:25 pm

Emilio’s perfect storm

Is the arch-dealmaker and indefatigable head of Banco Santander finally about to come unstuck?
Emilio Botin, chairman of Spain's biggest bank Santander©Reuters

Most mornings in Somosaguas on the northwest fringes of Madrid, neighbours who are awake can spy a spritely, diminutive septuagenarian taking a 6am stroll around his home or on his treadmill. Later he might play a round of golf or go to the gym. In between he runs continental Europe’s biggest bank.

Meet Emilio Botín, head of Banco Santander and king of Spain’s business community. Seventy-eight years old, quietly spoken and 5ft 8in tall, Botín looks like a man who could have retired 10 or 15 years ago. He doesn’t travel the world delivering tub-thumping speeches. He rarely gives interviews and only seldom meets investors, analysts or journalists.

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“El presidente” (“the chairman”), as his colleagues and even members of his family call him, is certainly understated. But he has the swagger of the long-successful businessman about him, nonetheless: the pristine grooming, the thinning but still jet black slick of hair, the tell-tale Spanish strut.

This is the man who has turned Banco Santander from a small regional Spanish lender into one of the biggest banks in the world – from Barcelona to Britain via Brazil. Today he presides over an institution with assets that come close to the GDP of Spain. And after 26 years as chairman, he has become the longest-serving head of any big bank, providing continuity of management at a time when the global financial crisis has burnt through bank bosses like wildfire. Most extraordinary of all for a group that is valued at nearly €70bn, and is 98 per cent owned by outside investors, Botín and his family still have huge influence over the running of the business, with the chairman himself often scrutinising individual loans.

Emilio Botín, in his trademark red tie, photographed in Santander in 2008©AP

Emilio Botín, in his trademark red tie, photographed in Santander in 2008

Some of Botín’s success must stem from his sheer physical energy. A friend recalls seeing him at the Monza Formula One Grand Prix a couple of years ago, when Ferrari – sponsored by Santander – swept to victory with Spaniard Fernando Alonso at the wheel. “Emilio had a little Ferrari flag and as soon as the car was over the finish line, he leapt out of his box waving it furiously and then sprinted along towards Alonso. He ran for 200m. He’s incredible.”

Quiet but calculating, Emilio Botín’s acumen has been his other key asset. Born into banking like his father before him, he did not rest on his laurels, but saw repeated opportunities to grow, expanding the business with an appetite unmatched by even the most brazen Wall Street giant. In the process, he created one of the world’s leading banks and a vital artery of the Spanish economy. “Emilio is now the most powerful person in Spain,” says one rival banker who knows him well. “He runs the country completely,” he jests.

Botín’s story and that of the banking group he has built are, by any standards, pretty extraordinary tales of success – all the more so, given the economic misery that currently engulfs Santander’s home market of Spain. After more than 50 years at the bank, half of them in charge, his empire extends across 10 countries, with hefty operations in Latin America, the US and the UK to offset the more troubled domestic market. Excluding (mounting) bad debt charges, the bank makes an astonishing €25bn profit year in year out. By a variety of measures – operating profits, dividend yield, market value, balance sheet size – Santander is one of the top 10 banks in the world.

Yet there is a problem. Despite Botín’s remarkable record to date, investors are losing faith in the Santander story. “They have had a good crisis but it’s a question of the future,” says one big asset manager who no longer holds the bank’s shares. “You don’t invest looking backwards but looking forwards.” As that kind of mentality has taken hold, shareholders have been deserting the bank. Even since the strong autumn bounce in the stock market, Santander’s shares are barely up, underperforming rivals at home and abroad.

The reason? Santander is facing a perfect storm. Its domestic market lies in tatters – annual results next week will show the extent of the damage. Questions are increasingly being raised over the bank’s financial strength. And the chairman himself is now 13 years beyond normal retirement age without a clearly communicated succession plan. Trouble is looming, whichever way you look at it, for Botín and for Spain’s biggest bank.

Emilio Botin with Santander-sponsored F1 driver Fernando Alonso in Singapore last year©Sutton Images/Corbis

With Santander-sponsored F1 driver Fernando Alonso in Singapore last year

BANKING DYNASTY

Emilio Botín-Sanz de Sautuola y García de los Ríos, Marquis Consort of O’Shea was always going to be a banker. His grand­father (Emilio I) had been chairman of Santander from 1909. His father (Emilio II) took over in 1950. And, sure enough, in 1958, as a moneyed 23-year-old aristocrat with degrees in law and economics, Emilio III joined the family firm too.

Botín’s apprenticeship taught him the business from the bottom up: he analysed credit risk, he represented the bank on the boards of the many industrial companies that the bank owned, and built a network of valuable business contacts in the process. Robert Tornabell, a professor at Barcelona’s Esade business school, has known the Botíns for years. “A key moment for young Emilio came in the late 1970s when he helped the group avoid the banking crisis in which Spain lost 57 banks,” says Tornabell. “It was the banks’ industrial shareholdings in troubled mining companies and steel companies that killed them. But Emilio understood the risks of owning those stakes and told his father to sell them.”

Despite such flashes of influence, swaths of Botín’s first 28 years at the bank passed by in a mix of boredom and frustration, as the heir-in-waiting found himself routinely kept in check by an overbearing father. “He was always asking questions, he was always very curious,” recalls one contemporary. “But he wasn’t given much responsibility, he kept a low profile and he never challenged his father. He was just hanging around waiting.” Towards the end of that period, one friend remembers Botín – a “frustrated rich kid with nothing to do” – almost in tears, complaining that his father never delegated anything to him.

The late Emilio Botín Sr, who only gave way to his son in 1986 when he stepped down as chairman, aged 83©Getty

The late Emilio Botín Sr, who only gave way to his son in 1986 when he stepped down as chairman, aged 83

But the tough treatment appeared to motivate the young Emilio, rather than break him. In 1986, at the age of 52, his then 83-year-old father finally deemed it time to hand over the chairmanship. This was the son’s chance to realise a far more ambitious vision for the bank than his forebears had ever had – and he did not hesitate. Like a coiled spring set loose he has committed his life ever since to expanding Santander, taking it multi­national, turning it into Spain’s biggest bank and elevating himself in the process into a legendary public figure with a vast personal fortune (Forbes puts it at $1.1bn).

Aided by behind-the-scenes networking, Botín now commands such status that even his critics believe him to be untouchable. The chairman prides himself on his political connections – and there was an especially close relationship with the former prime minister José Luis Rodríguez Zapatero. In late 2011 the outgoing PM even pardoned Botín’s chief executive, Alfredo Sáenz, following a criminal court guilty verdict that was set to see him barred from banking for three months.

There are conspiracy theorists, motivated in many cases by professional envy rather than fact, who allege far worse against the Santander chairman. But there does seem to be a darker side to Botín: there have been several legal scandals over the years, most recently when a secret Swiss bank account dating back to 1937 was exposed by a whistleblower, triggering a swift €200m settlement with the Spanish tax authorities.

And yet much of the domestic press portrays Botín as a faultless national hero, rarely reporting anything negative about him or the bank. Critics suggest that they may be keen to protect the advertising revenue on which the Spanish media is unusually dependent. “The pressure he exerts is incredible,” says one senior banker.

THE DEALMAKER

Whatever else he may be, Emilio Botín is a consummate banker. In contrast to many rivals who have tripped up through the financial crisis, he has excelled at the two basic disciplines of banking – risk management and cost control – often delivered through top-notch IT.

On a picturesque hillside a few miles from the bank’s original home town of Santander on Spain’s craggy north coast, the bank has just thrown up a clutch of brutalist buildings. The new €250m Cantabria data centre is one of five being erected around the world to help cut costs and improve risk control by giving managers live information on loans in all the markets where the bank operates.

The newfangled systems are buttressed by an old-fashioned approach. “In August, we spent three days locked away in the town of Santander, assessing all our exposures of over €50m country by country and counterparty by counterparty,” says Matias Inciarte, 64, who heads responsibility for risk.

Controls like this helped Santander ride Spain’s boomtime growth in the decade before the financial crisis, without the level of subsequent loan defaults that finished off many of the country’s smaller, less sophisticated lenders. But Botín’s success is twin-engined. Alongside his obsession with the finer details of banking is a wilder streak.

The business of buying up rivals has always got the chairman’s blood racing – and enhanced his power at home and abroad. Combining charm and ruthlessness, he struck his first decisive deal in 1999, when Santander merged with Spanish rival Central Hispano. Botín – already nudging normal retirement age – was supposed to share power with his opposite number, perhaps bowing out after a year or two. Instead, within weeks he had seized control, controversially spending more than €160m of bank funds to persuade Central Hispano executives José Amusátegui and Angel Corcóstegui to go quietly.

Similar drive was also on display a decade later in what was at the time the biggest ever bank takeover – and has since become the most notorious. The three-way acquisition of Dutch bank ABN Amro in 2008 – an unmitigated disaster for RBS and the Benelux-based banking group Fortis – was a triumph for Santander. One senior RBS executive of the day recalls how his now humbled CEO, Fred Goodwin, was outsmarted by the Spaniard. “Emilio played Fred like a Stradivarius,” says the banker. “He used to put his arm around him and say, ‘Fred, you’re such a brilliant CEO,’ and at the same time, metaphorically, he was picking his back pocket.”

Emilio Botin and Fred Goodwin©Reuters

‘Emilio played Fred [Goodwin] like a Stradivarius. He used to put his arm around him and say, “You’re such a brilliant CEO,” and at the same time, metaphorically, he was picking his back pocket’

While RBS was left with the most toxic parts of ABN, which subsequently contributed to the bank’s failure, Santander not only secured ownership of a prized Brazilian operation but also pulled off one of the most brazen “flips” ever seen in the world of mergers and acquisitions, selling ABN’s Italian unit Antonveneta on to Italy’s Monte dei Paschi di Siena for €9bn only days after acquiring it for €6.6bn from the Dutch bank.

The dealmaking bravado has worked in reverse, too, with Botín shedding bits of the group to raise cash and help it through the deepening Spanish crisis. In December 2011, executives of the bank gathered in the bowels of the five-star Botín-owned Hotel Real hard by the family seat in Santander town. On the agenda was one special item: how would they respond to the unprecedented call from European regulators – spooked by the deepening eurozone crisis – for €15bn of fresh capital?

People at the meeting recall Botín’s no-nonsense insistence on tackling issues head-on and fast. Within weeks, Santander had raised the money – it sold its Colombian arm, floated a stake in its Chilean subsidiary and accelerated a convertible share­holding sold to Qatari investors in Santander’s Brazilian subsidiary. “Santander is at its best when faced with a crisis,” says one senior figure at the bank. “It moves very quickly when it smells a problem.”

KEEPING IT IN THE FAMILY

Such speed of response stems from the family. It is a century since a Botín first chaired Santander. Three generations on and the family influence is clearer than ever. The Botíns’ ownership might have dwindled to barely 2 per cent, from 40 per cent in the 1980s, but they are still running the show and command three seats on the board.

Botín often starts his working day by 7am, haranguing executives with demands for the latest operational data. One former colleague describes his office – at the hub of Santander’s 250-hectare campus headquarters in Madrid – as “like a Bond villain’s lair”. “He almost has a home there, with a kitchen and a bed where he takes a siesta sometimes. It’s perched at the top of the main building. From it he can see everything.” Below is a vast boardroom, where Botín meets visitors. At a recent breakfast appointment with the FT, he arrived – a polite five minutes late – proffering a gift: a Bulgari tie, Santander red, identical to those worn by staff right up to board level (including Botín himself) in an almost cultish devotion to the brand. The chairman, presumably nervous of probing questions about the bank’s exposure to the troubled Spanish market, had refused an on-the-record interview but he was a gracious host nonetheless, and evidently firm in body and mind despite his age. As at most meetings, he was quietly dominant, the revered patriarch.

Botín leads a model healthy existence these days – he is virtually teetotal, eats carefully (picking at scrambled egg whites and fruit for breakfast) though he has one vice that is a key source of energy, says a friend: a taste for caffeine. “He always has a can of Coke in his hand. Sometimes he’ll even show up at an evening function with a Coke and a packet of nuts.”

Colleagues say Botín’s work ethic and long hours away from home – not to mention his passion for F1 – have led to an increasingly distant relationship with his long-time wife, Paloma – a pianist and founder of a music college. Yet the Botín family remains tight-knit. Jaime Botín, the chairman’s brother, part-owns and heads another of Spain’s big lenders, Bankinter. Javier Botín, the youngest son – tainted by a big misjudged investment in the infamous Bernard Madoff Ponzi scheme – helps run the family foundation and sits on the main bank board.

Ana Patricia Botín, CEO, Santander UK©Shaun Curry

Ana Patricia Botín, CEO, Santander UK. ‘Whatever Emilio expects from most people who work for him, he expects twice as much from Ana’

But the pivotal family relationship is between Botín and his eldest child. Ana Patricia, currently head of Santander’s UK subsidiary, is the only top-notch banker among the Botín offspring and the chairman’s most likely heir. Friends say that there is also an element in their relationship of the tough love Botín experienced at the hands of his father. “Whatever Emilio expects from most people who work for him, he expects twice as much from Ana,” says one. He sometimes appears to treat her both in public and in private like “the truculent teenage daughter”, adds a former colleague.

Ana Patricia is 52, and an ultra-elegant, modern, international version of her father. Educated in the UK (at the Catholic boarding school, St Mary’s Ascot) and in the US (Bryn Mawr college in Philadelphia, then Harvard), she began her career as an investment banker at JPMorgan, before switching to Santander 24 years ago. Her broad banking experience, perfect English and more transparent manner suggest she might even make a better chairman than her father. People she has worked with praise an impressive ability to combine toughness with the charm vital to court clients and foster staff loyalty. She has a mixed record of success within the group, however. Her early management roles were less than impressive – attempts to build a Santander investment banking operation and push rapid Latin American expansion both had to be reined in. But her last post, heading Spanish subsidiary Banesto, went well – profits nearly doubled over the seven years to 2008. In her current job at Santander UK, she has overseen a sharp decline in the bottom line, albeit amid a difficult economic environment.

Today Ana Botín – rebranded for the British market without the complicating “Patricia” – is working harder than ever. Following her father’s model, she rises early, at 6am, trains intensively on a home workout machine then heads to the London office. She has a home nestled between Kensington and Victoria, though she still takes weekly trips to Madrid for executive board meetings. Invariably immaculate, she has refined tastes – often breakfasting (on tea and a croissant but nothing more indulgent) at an exclusive SW1 hotel, and at evening events sipping champagne in preference to wine (though never much of that either).

The Botíns’ regal lifestyle includes the use of Santander’s two private jets. There are homes in central Madrid, in Santander town and 100 miles south of the capital in Ciudad Real (a classical finca, with horses and thousands of hectares of hunting land). Emilio Botín’s favourite holiday destination is Tanzania, where he spends large sums on big game hunting. Friends say he has even shot elephants and relished the thrill of the chase and the felling of a giant adversary.

Part of Santander’s state-of-the-art Madrid HQ, featuring 1,000-year-old shipped-in olive trees©Bloomberg

Part of Santander’s state-of-the-art Madrid HQ, featuring 1,000-year-old shipped-in olive trees

Now, though, the grandiosity of the chairman’s lifestyle is in stark contrast with a stagnant share price, as critics have begun to notice. Nowhere is the Botín ego clearer than in Santander’s physical presence. At that Cantabria data centre, the windowless control hub is like a Nato war room. More opulent still is the Madrid headquarters – with an orangery-themed reception area, golf course, tennis courts and 1,000-year-old shipped-in olive trees. Arriving at the campus is like entering another nation state, so stiff is the security, and in the futuristic welcome centre, visitors are greeted and chaperoned by 3ft-high multilingual robots.

THE BACKLASH

On March 30 last year, a revolution against the Botín way of doing things began in earnest, as investors filed into the bank’s annual meeting at the modernist exhibition centre in Santander.

Ahead of the AGM, the family and the rest of the bank’s management had been expecting the usual resounding support from shareholders. But this meeting was set to be different. Many of Santander’s long-supportive individual investors were seething – 140,000 of them had bought an aggregate €7bn of so-called valores, a kind of mandatory convertible bond, which had been issued to help finance the ABN deal but was now about to convert into shares worth less than half the amount they paid for them.

At the same time big institutional investors were preparing to rebel over what they saw as an over-cosy boardroom. Opposition was fuelled by a global mood of protest over pay and governance – this was the so-called “investor spring”. As usual, Botín’s powers were buttressed by the many small shareholders who routinely waive their voting rights, transferring them instead to the family. Even so, Botín’s re-election to the board was opposed by nearly a quarter of investors in protest at the bank’s lack of independent directors.

Botín in 2005 with former Spanish PM, José Luis Rodríguez Zapatero, with whom he enjoyed a close relationship©Reuters

Botín in 2005 with former Spanish PM, José Luis Rodríguez Zapatero, with whom he enjoyed a close relationship

Santander claims that half of the 16-member board are independent. But in reality only two would qualify under the governance standards of many countries – not only are there three Botíns, the remainder have been on the board for at least 10 years. “Governance is a sham,” reckons one long-time investor. “It’s just the family running things.” Another comments: “That kind of structure can often work well and to investors’ advantage. But the danger is that sentiment can change.” Critics draw parallels with the status of the Murdoch family within News Corp – once the power base of the media empire, now more of a problem. Another quirk at Santander is that while a standard company might have a chief executive whose management actions are policed by a non-executive board, Botín has retained for himself an unusual degree of power as executive chairman.

A sprinkling of board members concede that governance needs improving, but the official Santander position is unapologetic: “The bank’s successful growth and steady performance through the crisis is due in large part to its corporate governance, and not in spite of it.”

Some of those who protest about Santander’s shortcomings in the boardroom do so on ideological grounds. Others criticise dangerous practical knock-on effects from what they see as a regime that allows Botín’s ego to go untrammelled. Take acquisitions and dealmaking, which one investor describes as an “obsessive compulsive disorder” in Botín. “He’s like a private equity guy,” says another disaffected investor, criticising Botín’s sweeping strategy of turning Santander into a holding company for subsidiary banks around the world, reducing its ownership of its fastest-growing units in Brazil and Mexico in a dash for cash. That in turn hurts the value of shareholdings in the group as a whole.

Investors’ other big beef is with the bank’s dividend policy and what many see as Botín’s obstinacy in maintaining a payout even as bad debts mount at home and abroad, weakening profits. Payouts for 2012, analysts forecast, will amount to more than 160 per cent of profits – dwarfing a typical company payout ratio of 20 to 40 per cent. “Santander doesn’t need to pay out so much,” says one top 10 investor. “They should reset the dividend at a lower level. That would strengthen the balance sheet.”

Undeterred, Botín trumpets the fact that Santander has maintained its dividend at around 60 cents a share right through the financial crisis. The payouts, he argues, reflect an old-fashioned desire to be a steady income source for investors – particularly the bank’s 3.3 million small private shareholders, many of whom are also bank customers.

But there is a second big driver for the dividend – and also another example of the potential conflict of interest that comes with the Botíns’ dominance at Santander. In May, the family took a €15.5m cash dividend on their shareholding, with a further €1.9m paid out in stock. A clutch of wealthy family friends, who are among the largest individual shareholders, also value the payouts. According to people who know the family well, they rely on the flow of dividends for much of the income that supports their lavish lifestyles. There have also been debts to service. As Santander’s share price has fallen amid the crisis, Botín and other family members have bought close to €90m of shares, Bloomberg data show – often with borrowed money, people close to him say – not to mention the burden of that €200m tax bill.

The ego that critics point to in Botín is also an overarching reason for the dividend strategy, they say. “The dividend policy is unsustainable,” says one investment banker who knows the chairman well. In his view, “Botín would be well advised not to sustain it. The only real reason he does it is to show he has cojones.”

SUCCESSION CRISIS

Many of these issues remain annoyances and niggles for the time being. But as the bank’s underperforming share price suggests, worse may lie ahead. There are three big risks which excite progressive degrees of alarm among investors, and any of them could wreck the Botín success story.

First, the regulatory threat. The recent €40bn bailout by European authorities might have helped the country’s more troubled banks, but the EU’s quid-pro-quo demand – that bank supervision should move from a national to a pan-eurozone level – could prove costly for Santander. Though the bank insists its capital position is strong, analysts at Barclays reckon Botín might be forced to fill another black hole of up to €18bn as the relatively soft-touch Bank of Spain regulators give way to a tougher European Central Bank.

Worse still, of course, would be a further deterioration in the Spanish economy and even, at the unlikely extreme, some form of sovereign default. House prices have already tumbled 50 per cent from their peak and unemployment has spiralled above 25 per cent. If the Spanish government found itself unable to repay its debts, too, all of Santander’s other troubles would pale into insignificance. Over the past year, rather than reduce its risky exposure to Spanish sovereign debt, Santander has actually increased its holdings of government bonds – from €24bn a year ago to €30bn – lured by high yields and under pressure to help out the Spanish state.

Combined – and in the absence of deeper EU intervention – that all distils down to one simple equation: if Spain fails, Santander fails.

Yet more inevitable than any macroeconomic crisis is the threat posed to Santander by Botín’s own mortality. Given his quarter-century of dominion, how Santander will adapt when the chairman can no longer lead the bank is a pressing question – but one that Botín himself, much to investors’ frustration, always refuses to address when quizzed. His supporters suggest he may want to stay in the job for another five years. “Emilio’s father had such an influence on him,” says one friend, “that 83 is the natural milestone that he will be focused on.” All the same, a succession plan will have to be put into action at some point. And herein lies a problem – redoubled because Alfredo Sáenz, the bank’s 70-year-old chief executive, has been toying with retirement for years. Botín’s other key lieutenants – the Inciarte brothers – are widely seen as too old (Matias) or too gung-ho (Juan). An earlier favourite for the CEO job, António Horta-Osório, left Santander in a surprise defection to Britain’s Lloyds Bank two years ago.

The only obvious remaining choice to succeed Botín – his daughter Ana – would preserve dynastic control. But Ana, whose role heading the UK subsidiary was supposed to complete her apprenticeship for the top job, has her hands full with a struggling business. Nearly two years into her role, significant profit growth looks elusive and an acquisition that would have turned Santander UK into an important small business bank has fallen apart. That in turn makes a float of the UK operation – seen as a prospective rubber stamp of Ana’s eligibility to succeed her father – look like a distant hope.

Botín’s dilemma comes down to this: he does not want to retire, yet failing to hand over the reins soon to his daughter could undermine family control of the bank. “If Emilio dies in the job,” says one associate, “Ana may not have the level of backing internally to succeed him.”

After decades of spectacular success, Emilio Botín and the multinational family firm he created are showing signs of unravelling. He might head a dynasty of great bankers, shrewd networkers and decent dealmakers. But even “el presidente”, powerful as he is, is not omnipotent.

Patrick Jenkins is the FT’s banking editor

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