Slimline Spanish banking sector climbs off canvas

Spanish banks and their clients, embattled during the financial crisis, are fast regaining confidence. The banks are improving their wealth management offerings and extending their influence across regions and national borders. Clients are similarly diversifying their assets and increasing allocation to mutual funds and real estate.

“Spain is growing 2.5 per cent this year, and real estate prices are climbing. It’s not like before the bubble, but we are seeing signs of resurgence,” says Luigi Pigorini, CEO of Citi Private Bank Emea.

One key driver shaping the new landscape is a massive consolidation wave, sweeping through Spanish finance. 

Banco Sabadell is in the midst of a £1.7bn  (€2.4bn) takeover of the UK’s TSB. Popular Banca has added more than €600m in client assets after acquiring Citi’s Spanish consumer and private banking unit, while Santander has emerged as the preferred merger partner of Pioneer Investments, Unicredit’s funds franchise. 

After a string of recent purchases, Barcelona-based CaixaBank is expected to become the leading financial house across the Iberian peninsular if its €1.08bn bid for the remaining shares of Portugal’s BPI, of which Caixa already owns 44.1 per cent, proves successful.

CaixaBank differs from leading competitors, in that is owned by a Foundation, so €500m in annual profits are earmarked to fund projects benefiting disadvantaged children, the elderly, social housing and job creation for marginalised individuals.

Caixa absorbed Banca Civica, an emergency bank created by the Spanish authorities to run a range of failing regional savings institutions, at the end of August 2012. More recently Barclays’ Spanish operations were also added to the growing franchise.

These consolidations have only been made possible by a technological revolution of which banks in other European countries would be envious. “Nobody else in the market can do this,” says Victor Allende, CaixaBank’s engaging, bearded private and personal  banking boss, proud of integrating five different platforms in nine months.

The group's recent purchase of Barclays added 4,000 new private clients and €5bn to the assets he manages, now totalling €50bn and he is clearly hungry for further growth. “The technology that Caixa owns makes this process possible,” he says.

Mr Allende has witnessed Spain’s 53 main banks squeezed down to 14 players over the last five years and believes that Caixa “took advantage of that situation much better than others”.

He puts this down partly to an ability to reduce numbers of employees working in processing jobs. Barclays’ Spanish servicing centre accounted for 35 per cent of the bank’s 2,500 staff in the country, while CaixaBank only needs 6 per cent of its 31,000 total employees dedicated to these roles, testament to the digitisation of many tasks.

“This is why some banks are unable to do profitable business in Spain,” suggests a combative Mr Allende. 

High volume sales of mechanised structured products have also long been a feature of Spanish private banking, feeding through quickly into the bottom line. Caixa alone currently oversees €9bn of assets in these product ranges. 

But the big news is of a huge boom in mutual fund sales, with products from the likes of the UK’s M&G and France’s Carmignac proving popular.

Boosted by straightforward trading platforms and low deposit rates, Mr Allende’s teams across both private and personal banking segments sold €4.8bn worth of mutual funds in the first three months of 2015 alone and he is keen to broadcast this. “Competitors ask me – what are you doing to increase your position in mutual funds at Caixa? I ask them – what are you not doing at your bank? It should be normal to have a huge increase nowadays in mutual funds. The tools are there to recommend funds and we have established risk profiles.”

But he has also changed the compensation system, after regulators asked the bank to avoid conflict of interest among advisers. Ten per cent of “variable rewards” are now related to client satisfaction and there is no difference to bonuses received for selling own-brand or third party funds.

Since the introduction of this new model, he insists quality and avoiding such conflicts have become ingrained in the bank’s culture. “We are ahead of the market on this,” he says.

He is even prouder of the latest reporting tools allowing private clients to have much closer control and monitoring over investments. These have allowed more cross-selling of products, efficiency and a healthy ratio of around 100 clients per private banker, which he hopes to further reduce to 75. “Without technology, we simply can’t do private banking at this level,” says Mr Allende.

The Ligna Abierta (“open line”) online banking service operating across the group has been further refined to feature a “Wall”, a fully secure channel allowing communication between private and business clients and their consultants. Private bankers can make proposals to clients or re-allocate portfolios in a matter of seconds.

“It has gone ballistic,” enthuses Mr Allende, reporting more than 50,000 contacts with private clients each month. “The client opens his banker’s proposal in the Wall, makes one call and we complete all the investments.”

This development means emails containing client data no longer need to be sent. “A smart PC now allows us to take the whole bank to a meeting with the client,” with digital signatures now accepted in place of a paper-and-pen sign-off.

If there has been one area in which Caixa has been slow to progress it is in organising loans, with only €1.2bn currently loaned to private clients. “Now that the economy is growing, we have a huge opportunity to improve that position,” suggests Mr Allende.

The biggest trigger for technological developments has been regulation, says Manuel Sanchez de Valle, chief financial officer of private banking at Popular Banca Privada, which runs Ä6.5bn in client assets.

The first wave came after Mifid in 2007, which introduced reporting requirements “too expensive to execute and control without a good technological platform”.

Mifid II, due in 2017, will further increase requirements to such an extent, that “not having a tech platform would put you in the position of a minor, boutique player,” suggests Mr Sanchez de Valle.

Although many Spanish private clients are of an older age group, simply requiring “excellent service, availability of advisers and quick answers,” customer needs will soon change as wealth is passed to the next generation.

“We will all disappear and as our heirs take up family fortunes in private banking, technology will become more visible,” he says. “Institutions need to be working on this front, not necessarily as a technological breakthrough for today, but for when things change. It’s coming and you can’t forget about it just because your clients don’t ask you for it.”

Technology is also a massive focus at Grupo Santander’s operational headquarters, housing 6,000 employees, complete with a golf course, latest specification artificial football pitches, a medical centre and onsite corporate university complex, with accommodation for 160 students.

Central to this “Santander City”, boasting its own motorway exit, is a pair of top-security, subterranean data storage centres. “People are looking for a real feeling of security of information,” says Luis Moreno, head of global private banking at Santander, responsible for €160bn in client assets. “The fear factor is very high. When you combine this with news of hackers going into the [US] National Security Agency or Google, many clients are still scared of using online tools to discuss investments and personal wealth.”

This is why security and efficiency of platforms is more of a priority than recreating a social media format for communications.

The completion of a programme to integrate private banking operations of Banif, Banesto and Santander under one brand added extra urgency.

“Our priority has been in developing very robust IT tools to really make sure every client is correctly advised,” says Mr Moreno.

Similar services are provided for clients in all countries in the Santander portfolio, with emphasis on helping clients in one jurisdiction invest assets and do business in another.

“The private banking value proposition is very much the same in Spain as Latin America,” says Mr Moreno, although local regulations need to be borne in mind. “These markets share a common asset allocation and macro view. If a client in Spain wants to invest in Brazil, then the input from our Brazil team could make a lot of difference for them. All the markets are interconnected.”

Latin American entrepreneurs are also keen to buy property and set up subsidiaries in Europe, he says. “We can give them access, through private banking, to people who can help them with their business. This gives us a competitive advantage against other banks.”

But despite the excitement and renewed optimism generated within Spanish banks, they appear to have learned lessons from leaner times and are at pains not to over-extend themselves.

Santander, for one, remains cautious on prospects for private banking in the UK, despite its strong position there in retail branch banking after overseeing the merger of several building societies.

“When you think about private banking, one of the first things you focus on is investments,” says Mr Moreno. “Regulation in the UK is very tough. RDR [the Retail Distribution Review which has outlawed commission payments to distributors] and other rules have led to some players leaving the market of advising middle classes, as the process is so long and cumbersome that it does not pay off.”

Each type of investment will need to be examined individually, before it is eventually built into a new private banking offer, he says. But there is a feeling that Santander will be taking its time deciding whether to seriously attack the London market to compete with the likes of Credit Suisse, Investec and Barclays.

The bank’s management is currently absorbed by other issues, including satisfying US authorities with its capital plans.

“We have solutions for resident non-domicile clients for other countries, so we have that part of the market sorted,” says Mr Moreno. “Private banking, as of today, is in our schedule, but we have some other priorities which must come first.”

Global banks such as Citi are keen to point out the deficiencies of Spanish private banking, inferring their own advantages over the locals. “Wealthy private clients need to be advised by banks which follow international markets,” says Citi’s Mr Pigorini. 

“I am not saying Santander, BBVA or Popular can’t do it, but they don’t have the wherewithal to pick the best managers, as they are local. They might have the ability to pick the manufacturer of a fund for Latin American equities, but very few people want this. Spanish banks are very focused on retail and the low end of the private banking market.”

Indeed these local players are the first to admit they have a long way to go to catch up with the international expertise offered by the bigger cross-border players. “In Spain, private banking is still running a few years late, compared to other countries,” says Santander’s Mr Moreno. “Most banks had a private banking department with thicker carpets and newer premises, but not really a value proposition.”

As the banks gain critical mass, a renewed confidence and technical know-how, that could soon be about to change.