Trials and tribulations

FINANCE & ECONOMICS
Spanish banks

Jan 20th 2005 MADRID
From The Economist print edition

The bosses of Spain's two biggest banks are under fire

LAST year was a good one for Santander Central Hispano (SCH) and Banco Bilbao Vizcaya Argentaria (BBVA). Spain's two biggest banks did well at home and in Latin America, and SCH bought Britain's Abbey, in Europe's biggest cross-border bank merger. This year is starting less well, in particular for the two banks' bosses.

Emilio Botín, chairman of SCH, is due to stand trial twice. In the first trial, which is due to open next week, Mr Botín is accused of misappropriating funds by giving severance packages totalling €164m ($145m) to two former executives of Banco Central Hispano Americano, which merged with Mr Botín's Banco Santander in 1999. The deal ended a bitter power-struggle and made Mr Botín sole master of the newly created SCH. The date of the second trial, in which he is accused of falsifying documents to help clients to evade taxes in the late 1980s, has not been set. Mr Botín denies all charges in both cases.

Unusually, Spain allows private criminal prosecutions. The two facing Mr Botín are among 26 brought against him or his bank by an association of shareholders led by one Rafael Pérez Escolar. They are set to be the first to come to court. Spain's state prosecutor and attorney-general have tried to have them dismissed, as others in the series have been. Mr Escolar was an executive of Banco Español de Crédito (Banesto), a retail bank which collapsed in 1994 before being bought by Banco Santander. He was jailed for his part in Banesto's troubles.

Despite his legal headaches, Mr Botín has done a good job. When he took over from his father in 1986, Banco Santander was a small regional bank. Its takeovers have turned it into the euro area's biggest by market capitalisation.

Mr Botín's SCH is now working hard to make its latest purchase, of Abbey, pay. To replicate its sales-oriented model in Britain, it will cut back-office jobs and train Abbey staff to become better salespeople. SCH's executives were surprised that a lot of Abbey's products were sold by independent advisers, not by bank staff. Mr Botín predicts that SCH's net income in 2004 will have exceeded €3 billion, up by 15% from 2003.

Francisco González Rodríguez, chairman of BBVA, is the probable target of a construction company's plan to build a stake in his bank. Mr González's tormentor, Sacyr Vallehermoso, says it wants to become BBVA's biggest shareholder—not a tall order, given that no one now has a stake of more than 1%. Luis del Rivero, Sacyr's boss, claims he can buy 3.1% of BBVA's shares and control even more through alliances with other investors. To be entitled to a board seat, a shareholder must own at least 6.25%.

Sacyr has allies. The bank is based in the Basque country; and members of Basque families have held grudges against Mr González since he sacked them from the bank's board after a scandal over secret offshore accounts in 2002. Socialist politicians dislike him because of his close ties to the previous, conservative government. Recent comments by Pedro Solbes, the finance minister, suggest that the government favours Sacyr. Nevertheless, Mr González's detractors are unlikely to muster the strength to oust him.

Like Mr Botín, Mr González has been winning high marks from analysts. BBVA's profits are expected to have risen by one-fifth or more in 2004. The bank, which focuses on Spain and Mexico, made three clever acquisitions last year: a buy-out of minority shareholders of Bancomer, a big Mexican bank; a takeover of Laredo National, a Texan bank; and the purchase of Hipotecaria Nacional, a Mexican mortgage company. Davide Serra, an analyst at Morgan Stanley, reckons that all three will increase earnings per share.

Both Mr Botín and Mr González would like to buy abroad again, especially in Italy. SCH fancies Sanpaolo IMI, Italy's third-biggest bank by assets, of which it owns 8.6%. BBVA has been trying to buy Banca Nazionale del Lavoro, the number six, for four years. It already owns 15%, and controls almost one-third through a pact with two other shareholders. Both Spanish suitors are waiting for Antonio Fazio, the governor of the Bank of Italy, to drop his opposition to takeovers by foreigners. A hostile takeover is not the way to go about acquiring Sanpaolo IMI, says a senior executive at SCH. Despite their tribulations, Mr Botín and Mr González will be keen to pounce should they get the chance to buy.

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