Santander is in the global banking industry. Based in Spain, Santander has operations in Europe and Latin America primarily. The current conditions for the banking industry in Europe are challenging, on account of a number of different factors. The euro crisis is perhaps the biggest issue facing the banking industry in Europe, and all European banks are exposed. Santander’s exposure is thought to be relatively low as the company is well-capitalized, but some of the solutions to the problem that have been proposed would apply to all European banks, reducing the profitability of Santander if it were to face a situation where it had to increase its capitalization (AFP, 2011).
Beyond the euro crisis, the banking industry is facing a number of other challenges as well. Economic growth, particularly in Europe, is sluggish. This has the affect of reducing loan demand, creating an uncertain earnings environment (Putnis, Stimpson & Marais, 2011). Lastly, and of significant concern for Santander, is Basel III. This is a new set of regulations that has been introduced by the Bank of International Settlements in order to enforce greater stability on the banking industry. One of the most important aspects of Basel III is that banks will need to maintain more common equity on their balance sheets. This new regulatory burden is seen by some as decreasing the profitability of banks (The Economist, 2011).
To deal with the new regulatory burden, European banks have had to retrench. For its part, Santander has sold off subsidiaries in Latin America, but with new capital requirements most banks in Europe have had to find sources of capital in order to strengthen their balance sheets.
An additional characteristic of the current market is a high intensity of competition. This occurs at all three levels — retail, commercial and investment. Banks compete aggressively for business, and generally need to emphasize both service and price in trying to attract business. As banks earn their money on the spread between the rates at which they acquire capital and the rates they get for lending that money out again, and competition reduces those spreads, the industry can be challenging from a profitability standpoint, and banks forced to utilize a high-volume low-profit business model bolstered by strong service capabilities.
Thus, the current market conditions are challenging on a number of fronts. The regulatory environment is having a negative impact on the industry. The economic environment is also difficult, given low levels of demand for loans and especially given the euro crisis. Even if Santander has a relatively low level of exposure to the euro, the bank is still going to face negative outcomes if the euro slides further or if it is broken up altogether.
The Strategy Clock is a method of aligning firms within an industry to identify the strategy that those firms are using to compete in the marketplace. The clock is essentially two-dimensional with prices along the x axis and product/service differentiation along the y axis. If we examine Santander’s current strategy we see that the company is focused on differentiation primarily. The company has begun to retrench from Latin America, selling its stake in Colombia (Penty, 2011) and Chile (Tedesco, Roman & Esposito, 2011). These moves have reduced the level of differentiation that the company has, but were necessary to meet Europe’s increased capital requirements for banks (Ibid).
On the strategy clock, Santander would probably fit in the “hybrid” categorization between differentiation and low price. The company is a retail and commercial bank that seeks to differentiate itself with global operations, service levels and the bank’s brand. However, it must remain competitive with other banks, as customers will often shop around for the best rates on a loan. The hybrid strategy is #3 on the strategy clock, a position that has a high level of success. It is worth noting, however, that while companies with a level three strategy are attractive from the consumer’s point-of-view, it can be difficult to balance the need for low interest rates and the needs to be differentiated, while still being profitable. The ability to leverage economies of scale is essential to making such as strategy work.
Santander’s competitors have strategies that are quite similar. Some of those competitors, however, are differentiated either by having a greater geographic scope or because they are more oriented towards commercial business. Two main competitors are HSBC and BNP Paribas. These groups, like Santander, are vast in scope and feature different types of banking within their groups. HSBC is perhaps more differentiated, while Paribas is around the same level as Santander. There is, however, relatively little difference between firms in the banking industry (at least the largest ones), compared with the high levels of competitive differentiation seen in other industries.
AFP. (2011). Santander bank chief slams EU crisis plan. EU Business. Retrieved December 7, 2011 from http://www.eubusiness.com/news-eu/finance-economy.cyg
The Economist. (2011). Third time’s a charm? The Economist. Retrieved December 7, 2011 from http://www.economist.com/blogs/freeexchange/2010/09/basel_iii
Penty, C. (2011). Santander Latin America strategy stalls with Colombia sale. Bloomberg. Retrieved December 7, 2011 from http://www.businessweek.com/news/2011-12-07/santander-latin-america-strategy-stalls-with-colombia-sale.html
Putnis, J., Stimpson, A. & Marais, T. (2011). European banking industry outlook. SNL Financial. Retrieved December 7, 2011 from http://www.snlcenter.com/eurobankoutlook/default.asp
Tedesco, E., Roman, D. & Esposito, A. (2011). Santander sells a Chilean stake in effort to boost capital. Wall Street Journal. Retrieved December 7, 2011 from http://online.wsj.com/article/SB10001424052970203413304577083732238219036.html
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