MarketLine Case Study

Santander UK plc
Case Study
Becoming a major force in the UK
banking sector
Reference Code: ML00001-038

Publication Date: December 2011

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OVERVIEW
Catalyst
Banco Santander is one of the largest banking groups in the world with operations in Europe and the Americas. The
group has a powerful presence in the territories in which it operates and the UK is no exception. Santander UK plc is a
wholly-owned but separately capitalized subsidiary of Banco Santander. This case study shows how the Spanish giant
has risen to a position of prominence in the UK banking sector.

Summary
Santander has established a significant presence in the UK predominantly through acquisition. The process began back
in 2004 with the takeover of Abbey and continued with the crisis buyouts of Alliance & Leicester, Bradford & Bingley and
the ongoing EU-mandated acquisition of the RBS retail network.

The bank has chosen to pursue a price/product led strategy rather than using quality of service as a differentiator and
competitive advantage. Santander mortgages, credit cards, loans and interest bearing accounts are all among the most
competitive on offer in the marketplace. Furthermore, the bank has utilized a highly visible and successful marketing
campaign to make this known to potential new clients.

Santander remains primarily a retail bank with relatively little exposure to the areas of the financial markets most affected
by recent market turmoil, particularly when compared with some of its peers. The management's controlled risk appetite
has allowed Santander to retain a strong balance sheet, something which has proved to be a vital competitive advantage
as its competitors have struggled.

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TABLE OF CONTENTS
Overview ............................................................................................................................................................................. 2

Catalyst............................................................................................................................................................................ 2

Summary ......................................................................................................................................................................... 2

Analysis ............................................................................................................................................................................... 6

Santander has established itself in the UK through a series of acquisitions .................................................................... 6

Santander's first foray in to the UK banking sector came with the acquisition of Abbey in 2004 .................................. 6

Santander exploited the strength of its balance sheet to take over two beleaguered competitors in 2008 .................. 6

The EU-mandated sale of RBS assets provided an ideal opportunity for Santander to strategically expand............... 7

Santander has chosen to sell itself on the basis of product range and price ................................................................... 7

Santander is one of the UK's most complained about banks ....................................................................................... 7

Santander continues to attract new customers despite service issues ........................................................................ 8

Santander's success in client acquisition and retention is based on competitive pricing and product range ............... 8

The success of Santander's pricing policy has been supported by a highly visible marketing campaign ........................ 9

Santander took a conservative approach when rebranding Abbey, Alliance & Leicester and Bradford & Bingley ..... 10

Santander has used its scale and balance sheet strength as a competitive advantage ................................................ 10

The strength of Santander's position allowed it to take advantage of distressed competitors .................................... 10

Santander UK has a lower ratio of risk-weighted assets than its competitors ............................................................ 11

Much of Santander's revenue is still derived directly from retail banking activities ..................................................... 11

A diverse range of operations and geographical spread have also helped it retain a position of strength ................. 12

Santander's rise to become a UK banking powerhouse has not been without problems ............................................... 12

The bank's focus on retail banking has created an increase in non-performing loans ............................................... 13

Santander's subsidiarized structure and growth through acquisition have created double leverage issues .............. 13

Santander's revenues have been adversely impacted by issues specific to the UK .................................................. 13

Conclusion ........................................................................................................................................................................ 15

The Santander brand is now one of the best known and most respected in the UK financial services industry. ........... 15

Appendix ........................................................................................................................................................................... 16

Definitions ...................................................................................................................................................................... 16

Sources ......................................................................................................................................................................... 16

Further Reading ............................................................................................................................................................. 16

Ask the analyst .............................................................................................................................................................. 17

About MarketLine .......................................................................................................................................................... 17

Disclaimer ...................................................................................................................................................................... 17

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TABLE OF TABLES
Table 1: Santander UK plc: Key Statistics as of December 2010 ........................................................................................ 7

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TABLE OF FIGURES
Figure 1: Number of Complaints Received By UK Banks H1 2011 ..................................................................................... 8

Figure 2: Comparison of Package Current Accounts .......................................................................................................... 9

Figure 3: Lewis Hamilton, Santander Sponsored Athlete .................................................................................................. 10

Figure 4: RWA as a percentage of total assets ................................................................................................................. 11

Figure 5: Retail banking revenues as a percentage of total revenues for leading banks .................................................. 12

Figure 6: PPI Provisions by Bank ...................................................................................................................................... 14

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ANALYSIS
Santander has established itself in the UK through a series of
acquisitions
Santander embarked on the UK acquisition trail in 2004 with the takeover of Abbey and continued along the path with the
crisis buyouts of Alliance & Leicester and Bradford & Bingley in 2008. The ongoing EU-mandated acquisition of the RBS
retail network is expected to complete in Q1 2012.

Santander's first foray in to the UK banking sector came with the acquisition of
Abbey in 2004
Creating and organically growing a UK operating arm to rival the likes of HSBC and Barclays would have required a great
deal of time and significant investment. Furthermore, the success of such a strategy would have been far from certain
and elicited a need for Santander to launch its brand in the UK immediately. Consequently, the bank’s management team
opted to establish a presence through acquisition and targeted the long-established and well-regarded bank and former
building society Abbey.

It was announced in July 2004 that the two parties had agreed on the terms of an acquisition subject to shareholder and
high court approval. In November 2004, Abbey formally became part of Grupo Santander following a £9 billion ($13.9
billion) takeover which saw Abbey shareholders receive one share in the Spanish bank and 31 pence ($0.48) for each
Abbey share. In completing the deal, Santander acquired the UK’s sixth-largest bank and second-largest mortgage
lender. The acquisition gave Santander 741 UK branches and access to 18 million customers, a noteworthy presence in
the country.

Santander exploited the strength of its balance sheet to take over two beleaguered
competitors in 2008
Having successfully acquired and integrated Abbey four years earlier, Santander was a major player in the UK banking
sector by the time the financial crisis arrived in 2008 and looking to increase its presence further. The crisis and the
problems it caused Santander's competitors provided the ideal opportunity to leverage its balance sheet strength and
make strategic acquisitions. With the UK government being forced to step in and stave off the near collapse of both RBS
and HBOS, a private buyer for other stricken banks was very much welcome and so Santander swooped. The Spanish
banking giant decided to grow its UK franchise through the buyout of Alliance & Leicester in September 2008, a deal
which cost £1.3 billion ($2 billion) and added 270 branches to its already vast network.

Later the same month, it was announced that Santander was to take control of recently nationalized Bradford & Bingley's
197 branches and £20 billion ($30.9 billion) of deposits. At the time, Bradford & Bingley was the UK's biggest lender to
landlords, an area particularly hit during the financial crisis due to the collapse of the buy-to-let market and the resultant
high level of non-performing loans (NPL). Consequently, Santander opted not to acquire the former building society's
loan book, which remained nationalized. The acquisition of Bradford and Bingley's deposits and branch network cost
Santander £612 million ($945.1 million) and took the total number of Santander branches in the UK to around 1300.

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 Table 1: Santander UK plc: Key Statistics as of December 2010

Number of Branches Over 1,400

Number of Corporate Business Centers 25
Number of Customers 26 million
Number of Employees 25,656

SOURCE: Santander Annual Report 2010 MARKETLINE

The EU-mandated sale of RBS assets provided an ideal opportunity for Santander to
strategically expand
Santander has long felt that its share of the UK SME market is far lower than its natural market share and has
consequently stated that one of its goals is to increase its presence in this space. In November 2009, EU competition
commissioner Neelie Kroes announced that RBS and Lloyds Banking Group had to sell off their assets as a result of
accepting government bailouts the previous year. This provided Santander with a chance to expand its UK business
further. RBS in particular offered a strategically important opportunity due to its strong position in the UK SME market as
the bank’s CEO Alfredo Saenz acknowledged in his 2010 letter to the shareholders: “Over the next few years, our
objective is to speed up our growth in segments such as companies and SMEs where our presence is lower than our
natural market share. The integration of the business acquired from Royal Bank of Scotland will enable us to make a
significant leap forward in this aspect.”

In August 2010, it was announced that the two parties had agreed terms on the sale of 311 RBS-branded branches in
England and Wales, and seven Natwest-branded branches in Scotland. Two thirds of RBS deposits are held by
customers occupying the SME space and the £1.65 billion ($2.5 billion) deal will see Santander increase its share of the
UK SME market from 3% to 8% and become the UK's fourth largest bank by number of branches, surpassing HSBC. The
deal is expected to complete in Q1 2012.

Santander has chosen to sell itself on the basis of product

range and price
Santander has consistently performed poorly in terms of customer service, yet continues to outperform the market in new
client acquisition. It has chosen to position itself at the low end of the pricing spectrum and its offering is clearly price and
product led.

Santander is one of the UK's most complained about banks

Since entering the UK banking sector in 2004, Santander has garnered an unwanted reputation for poor customer
service. In the UK, complaints statistics are compiled and published by the regulator and these have shown that
Santander has often underperformed in customer service when compared to its peers. It should be noted however, that
the bank continues to make strides in this regard and two rival banks (Barclays and Lloyds Banking Group) both received
more complaints in H1 2011. Furthermore, Santander has greatly improved its speed of complaint resolution,
outperforming 'The Big Four' in the same period with over 95% of complaints closed within eight weeks.

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Figure 1: Number of Complaints Received By UK Banks H1 2011

300,000

250,000
Number of Complaints

200,000

150,000

100,000

50,000

0
Barclays Lloyds Santander HSBC RBS

SOURCE: FSA Complaints Data MARKETLINE

Santander continues to attract new customers despite service issues

Despite the aforementioned service shortcomings, Santander continues to perform strongly in the area of customer
acquisition, gaining around one million new UK customers in 2010. There were noticeable positive changes in the areas
of mortgages and deposits. Santander saw its share of the UK mortgage market increase by 0.38% and deposits
increase by 7% to £153.5 billion ($237 billion).

Santander's success in client acquisition and retention is based on competitive

pricing and product range
Santander offers a broad range of products encompassing loans, overdrafts, deposits and mortgages. In a bid to attract
new customers, Santander has pushed competitive pricing. For example, the bank's eSaver account which offers an
interest rate of 3.1% AER with a minimum investment of just £1 ($1.54) is a best-in-class product in terms of the rate of
interest paid and its standard loan interest rate of 8.3% for loans between £5,000 and £7,500 ($7,721 and $11,582) is
better than that offered by all but two competitors, one of which is a subsidiary of Santander.

Santander has aggressively pursued new current account customers, offering large switching incentives to encourage
customers to leave rival banks. New customers switching to a Santander Preferred, Reward or Premium account are
eligible for a £100 ($154.43) reward, while those doing so who also have a Santander mortgage can receive £200
($308.86). For customers switching who have a Santander mortgage and are able to deposit £10,000 in savings, a £300
($463.29) switching incentive is available.

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Figure 2: Comparison of Package Current Accounts

Barclays Additions
Active HSBC Advance Lloyds Gold RBS Royalties Gold Santander Premium
Monthly Fee £15 £12.95 £12 £12.95 £20
Overdraft Fee Nil £25 arrangement fee Nil Nil Nil
Up to £300 Nil. £301-
Overdraft Interest Rate (EAR) £5,000 18.3% 17.90% 17.32% 19.24% 0%

Up to £1,000 1.5%. 5% for first 12

Interest Payable on Credit Balances 0% 0% £1,000+ 2% 0% months, 1% thereafter

SOURCE: Company Websites MARKETLINE

Santander's Premium current account is the most expensive when compared to similar accounts offered by rival banks. It
does however, offer the best rate of interest on credit balances and it is the only account that does not charge fees or
interest for the use of an arranged overdraft. It is this kind of competitive pricing structure that has allowed Santander to
grow its customer base to 26 million in the UK.

The success of Santander's pricing policy has been supported

by a highly visible marketing campaign
When Santander first entered the UK banking sector in 2004, its brand was far from well-known to the average
consumer. A highly visible marketing campaign which pushed the bank's strength, extensive range of products and
competitive prices was needed and so Santander invested heavily in advertising. The campaign has taken several forms,
most notably sponsorship of sporting events such as the British Formula 1 Grand Prix, sports teams such as Ferrari and
McLaren Formula 1 teams and personal sponsorship of British Formula 1 driver Lewis Hamilton. This has been
complemented by TV advertising, often utilizing Hamilton as the face of the bank, and its sponsorship of Formula 1 has
given rise to the slogan: 'Driven to do better'. The investment in marketing has paid dividends and Santander is now a
familiar name on the high street with 92% of consumers recognizing the brand, a marked increase on the 20% in 2004.

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Figure 3: Lewis Hamilton, Santander Sponsored Athlete

SOURCE: www.marketingmagazine.com MARKETLINE

Santander took a conservative approach when rebranding Abbey, Alliance &

Leicester and Bradford & Bingley
When Santander entered the UK market in 2004, its management took the decision to build its brand in the country and
introduce it to the UK consumer gradually, an approach which has proved successful. When Abbey was acquired by the
Spanish giant in 2004, it was not immediately rebranded as Santander looked to exploit and build on its brand equity and
recognition. In 2005, the company's familiar flame logo was introduced to the Abbey logo. Bradford & Bingley branches
were rebranded but Alliance & Leicester continued to trade under that name and a separate banking license for two
years before being rebranded Santander. This gradual approach to rebranding was well-managed and averted a
potential backlash from the British public, who had seen familiar and respected brands disappear from the banking
landscape.

By the end of 2010, all acquired businesses had been rebranded and now that Santander is an established and
esteemed name in UK banking, the same is expected to happen with the businesses acquired from RBS once the deal
has completed.

Santander has used its scale and balance sheet strength as a

competitive advantage
Santander's strength and untarnished reputation during a period of tumultuous activity in the financial services industry
proved a competitive advantage which the bank was able to successfully leverage. This stemmed from effective risk
management over a period of time.

The strength of Santander's position allowed it to take advantage of distressed

competitors
When Alliance & Leicester and Bradford & Bingley were on the brink of collapse, they provided a rival institution with the
perfect opportunity to expand as takeovers and nationalization were the only real possibilities. Santander's strong
balance sheet, at a time when the likes of Barclays, RBS and HBOS were having to seek help from governments and
sovereign wealth funds, allowed it to swoop and acquire almost 400 branches and billions of pounds in deposits.

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Santander UK has a lower ratio of risk-weighted assets than its competitors
The percentage of risk-weighted assets (RWA) as a percentage of total assets provides a good indication of how risky a
balance sheet is, and in this regard, the state of Santander UK's balance sheet compares favorably with its rivals. RWAs
account for just 24.3% of Santander UK's total assets, less than Barclays (26.7%), RBS (32%) and Lloyds Banking
Group (41%). This means that Santander does not need to operate with as much capital as its competitors. Basel II
regulations state that a bank's capital ratio must be no lower than 8%. The capital ratio is the percentage of a bank's
capital to its risk-weighted assets and so by having fewer RWAs, Santander is able to operate with a lower capital base.

Figure 4: RWA as a percentage of total assets

SOURCE: Annual Reports 2010 MARKETLINE

Much of Santander's revenue is still derived directly from retail banking activities
Santander remains a predominantly retail banking franchise, with around 85% of its revenues coming from retail banking
in 2009 and 2010. This is a much higher percentage than that of its rival banks in the UK.

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Figure 5: Retail banking revenues as a percentage of total revenues for leading banks

100.0%

90.0%

80.0%

70.0%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
Santander Barclays RBS Lloyds Banking Group

SOURCE: Annual Reports 2010 MARKETLINE

Santander's decision to focus primarily on retail banking operations served it well during the global financial crisis as it
was less exposed to areas of the financial markets which were most affected by market turmoil, or so-called 'casino
banking'. Consequently, it remained relatively unscathed and was able to leverage its brand strength to win business,
most notably deposits, from customers whose trust and confidence in other financial institutions had been damaged.

A diverse range of operations and geographical spread have also helped it retain a
position of strength
Although Santander is very much a retail-focused bank, it has diversified in to areas such as life and non-life insurance,
global banking & markets (GBM), structured debt solutions and asset management. Furthermore, as a group, it has a
very strong presence in the growth markets of Latin America, particularly in Brazil, where the bank's subsidiary undertook
an initial public offering (IPO) in 2009. This has helped to mitigate, to some degree, the risks associated with struggling
economies in the UK and in the bank's home market of Spain.

Santander's rise to become a UK banking powerhouse has not

been without problems
While Santander has enjoyed a great deal of success in its bid to become a leading player in the UK, it has experienced
problems along the way and there is the potential for further issues in the near future, particularly with relation to
regulatory change. The UK bank levy is expected to have a detrimental effect on profits and the provisions the bank has
been forced to make for payment protection insurance misselling claims has already hit its bottom line.

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Furthermore, Santander's focus on retail banking and its exposure to the UK mortgage market has seen it hit by an
increasing number of non-performing loans.

The bank's focus on retail banking has created an increase in non-performing loans
While it is true that Santander's focus on retail banking meant that it avoided the worst of the financial crisis in 2008 and
2009, it has created a large exposure to the UK real estate market. In fact mortgages account for 51% of the bank's loan
portfolio. This market has been experiencing problems for some time with mortgage defaults rising amid a backdrop of
high inflation, increased unemployment and stagnant GDP growth. The effects of this have been seen in Santander's
non-performing loan (NPL) ratio, which has increased from just 2.02% at the end of 2008, to 3.55% in December 2010.
As the UK's economy continues to contend with the aforementioned problems, this trend is expected to continue.
Santander's inability to contain the growth in non-performing loans can be seen as a long term weakness and is
adversely impacting the bank's profitability.

Santander's subsidiarized structure and growth through acquisition have created

double leverage issues
Analysts have expressed concerns about double leverage between Santander and its subsidiaries as this can create
issues in the long term. In August 2011, Santander transferred £4.5 billion ($6.95 billion) from its main balance sheet to
that of the UK subsidiary. Double leverage is a capital raising activity by which the parent or holding company issues debt
and downstreams it to a subsidiary as equity capital. In this way, both the parent company and the holding company use
debt to finance the subsidiary. Although this increases equity capital in the subsidiary, it can impose earnings pressure as
profits from the subsidiary bank are used to service the parent's debt. In the event of a downturn, the subsidiary may
struggle to generate sufficient profits to do so, which can lead to the parent charging it, thus impacting profitability further.
This has been identified as a long-term structural weakness of Santander.

One potential solution to this issue is for Santander's UK subsidiary to follow the example of its Brazilian counterpart and
undertake an IPO to raise capital. Such a move was first mooted in September 2010 and when quoted in a Telegraph
article in that same month, Evolution Securities Bank Analyst Arturo de Frias estimated that the business was worth £20
billion ($30.9 billion) but added that a flotation would probably require a discount of 15-20% on this valuation.

While there was much speculation about an IPO in 2010, it has not yet materialized with analysts citing an uncertain
regulatory environment as the reason.

Santander's revenues have been adversely impacted by issues specific to the UK

In 2010, HM Treasury announced the introduction of a bank levy in the UK, which came in to effect on 1 January 2011.
The levy applies to the consolidated balance sheets of UK banking groups and building societies; the aggregated
subsidiary and branch balance sheets of foreign banks and banking groups operating in the UK; and the balance sheets
of UK banks in non-banking groups. It is based on total liabilities, excluding Tier 1 capital; insured retail deposits; repos
secured on sovereign debt; and policyholder liabilities of retail insurance businesses within banking groups.

The original plan stated a lower rate of 0.04% for 2011, but this was increased to 0.075% effective as of May 2011. The
negative impact on profits of UK banks is far from negligible and could be as great as 10% making the levy a serious long
term consideration for Santander and its competitors.

The UK has seen a spate of claims for the misselling of Payment Protection Insurance (PPI) in recent years with many
banks having to deal with thousands of claims. This has led to a need for the banks to make provisions, something which
has reduced profits. In Q2 2011, Santander announced that it had made a £531 million ($820 million) provision. This
impacted the bank's H1 net income figure which was down 47.6% on the previous year at £413 million ($637.8 million).
Furthermore, the bank's net income for the first nine months was £4.6 billion ($7.0 billion), down 13% when compared to
the same period last year. The provisions made may yet prove insufficient but are less than those announced by
Barclays, Lloyds Banking Group and RBS. It is however more than the charge made by HSBC.

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Figure 6: PPI Provisions by Bank

3500

3000

2500
£ Millions

2000

1500

1000

500

0
Lloyds Banking Group Barclays RBS Santander HSBC

SOURCE: Annual Reports 2010 MARKETLINE

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CONCLUSION
The Santander brand is now one of the best known and most
respected in the UK financial services industry.
Since entering the UK banking market with the acquisition of Abbey in 2004, Santander has rapidly and successfully
established a significant presence in the country. It has grown to what will be the fourth largest bank in the UK upon
completion of the RBS deal and thanks to this ubiquity and a highly visible marketing drive, the Santander brand is now
one of the best known and most respected in the UK financial services industry.

Santander has been able to leverage the brand strength and customer loyalty of the businesses it has acquired to gain a
foothold in the market and gradually introduce its own brand. Furthermore, it has successfully managed the potentially
difficult integration and rebranding of those businesses with very little in the way of customer and public ill will.

While it is only right to highlight the success of Santander's UK strategy, it must be noted that the process, and indeed
the future of the bank, is not without difficulties. The bank's growth through acquisition has created long term concerns
around double leverage and its high exposure to the UK mortgage market has led to a marked increase in NPLs.

Santander's UK journey has so far been a predominantly fruitful one but there is still a long way to go before the Spanish
giant can claim to have truly challenged the incumbent 'Big Four'. Although Santander has established a presence in all
sectors of UK banking, it has so far failed to become the market leader in any one. It is second in mortgages, third in
savings and fifth in current accounts, all areas upon which the bank's management will be keen to build.

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APPENDIX
Definitions
AER (Annual Equivalent Rate): the interest rate on a loan or financial product restated from the nominal interest rate as
an interest rate with annual compound interest payable in arrears.

Double Leverage: a capital raising activity by which the parent or holding company issues debt and downstreams it to a
subsidiary as equity capital.

IPO (Initial Public Offering): the first sale of stock by a formerly private company.

NPL (Non-Performing Loan): A sum of borrowed money upon which the debtor has not made scheduled payments for at
least 90 days. A nonperforming loan is either in default or close to being in default.

ROE (Return on Equity): The amount of net income returned as a percentage of shareholders equity.

RWA (Risk-Weighted Asset): a bank's assets or off-balance sheet exposures, weighted according to risk.

SME (Small and Medium Enterprises): companies whose headcount or turnover falls below certain limits.

Tier 1 Capital: Core capital, this includes equity capital and disclosed reserves.

Sources
Banco Santander S.A. 2010 Annual Report

Barclays PLC 2010 Annual Report

HSBC 2010 Annual Report

Lloyds Banking Group 2010 Annual Report 2010

RBS 2010 Annual Report

Santander UK PLC Company Website

Barclays Company Website

HSBC Company Website

Lloyds Banking Group Company Website

RBS Group Company Website

http://news.bbc.co.uk/1/hi/8069648.stm

www.ft.com/cms/s/0/973bf4b4-006e-11e1-ba33-00144feabdc0.html#axzz1c5HoK7m9

FSA Firm-Level Complaints Data H1 2011

www.guardian.co.uk/money/2011/feb/26/santander-britains-worst-bank

www.guardian.co.uk/money/2004/nov/13/business.abbey

www.fdic.gov/regulations/safety/manual/section4-3.html

www.marketing-comms.com/blog/blog-5-santander-building-bridges-with-mixed-metaphors

Further Reading
MarketLine (2011) Industry Profile: Banks in the United Kingdom

MarketLine (2011) Company Profile: Banco Santander S.A.

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