'Content' is king in Santander's march on capital markets
Spanish bank adds experience and sophistication to balance sheet power to grow capital markets business
Whether Santander is a capital markets sleeping giant is a point of discussion. Its balance sheet, at $1.8tr in 2021 according to S&P, makes it the 16th largest in the world.
It is by far and away Spain's biggest bank. The next two by balance sheet size, CaixaBank (45th in the world) and BBVA (46th), only measure about $800bn each, meaning that Santander is bigger than both of them combined.
Yet for all its size, Santander is not the storied name in capital markets that an outsider might expect it to be given the assets under its control. Aside from the Chinese banking giants and MUFG, which take up the top five positions in S&P's bank size table, the rest of the top 10 are all big capital markets players — JP Morgan, BNP Paribas, HSBC, Bank of America, Crédit Agricole.
Indeed, there are smaller firms than Santander that, it could be argued, spring more easily to mind when one thinks of capital markets heavyweights — Barclays, Deutsche Bank, Morgan Stanley, Société Générale and Goldman Sachs.
So if being able to deploy balance sheet is only one part of the equation, then what else counts?
Just over three years ago, Santander hired Conor Hennebry (pictured) to head up its European debt capital markets and syndicated lending businesses. In April 2020 he became global head of DCM and European head of syndicated loans.
Having spent over a decade at each of Deutsche Bank and Morgan Stanley, he is now in charge of Santander's efforts to grow its capital markets business.
Hennebry says that while a balance sheet the size of Santander's has been useful — especially in the pandemic when clients were looking to shore up their own futures — it would mean nothing for the growth of a capital markets business without what he calls "content"; expertise in complicated financial products, which means hiring and developing the right staff to deliver what clients need that few can provide.
But at the same time, the bank has also made moves to grow its position in less complex financial products than, say, additional tier one securities, or corporate hybrid debt, such as the SSA bond market. But even here, content is important, says Hennebry, as is having the right people with the right experience to deliver it.
Santander appears to be attacking capital markets on all fronts — even using its New York-based business to have a crack at the US corporate bond market, which is dominated by the big five US banks, and in high yield.
But at the same time, as GlobalCapital's editor Ralph Sinclair discovers, Santander's ambitions, while wide ranging, appear to be matched by its patience in achieving them.
GlobalCapital: Santander has invested a lot of balance sheet in its corporate lending business over the last two or three years. That is classically loss-leading business intended to lead to profitable ancillary business. What fruit has that borne? It's pushed you up the lending league tables, but has there been any further benefit?
Conor Hennebry, Santander: Actually, the growth Santander is looking to do is much more content-driven. We did make a specific decision at the time of the Covid crisis in 2020 to support our clients. You will see a big spike in where we were in the loan league tables in that year specifically. But you'll actually find that we've moved back to a more normal position since then.
That has certainly borne fruit in terms of the relationships we have with clients. But it has only borne fruit because we then built on it. I'm a strong believer that balance sheet without content is empty. We have tried to do the right mix of the two. There was a time, in 2020, when balance sheet mattered more; we completely understood that. Today, it's our ideas and our people, expertise and content that is making the biggest difference with clients in 2022.
GlobalCapital: When you say content, are you talking specifically about advisory work? What product specialisms do you have? Where do you have an edge?
Hennebry, Santander: We've made a number of investments in our solutions area. The biggest area where we've had an impact is in corporate hybrids. This is great to see, as they tend to be the area that requires the most structuring, the most work.
In the ESG area, everyone is showing growth. But we grew from only having one ESG structuring mandate in 2020 to 10 mandates last year. And we will exceed that number meaningfully this year.
We've also seen big growth on the FIG side in additional tier one deals, which again, is the most complicated, the most difficult product. We did our first external AT1 in 2020, two in 2021, and we are having a depth of dialogue with clients that we'd never had before.
Finally we've seen massive growth in the number of deals we're doing in US dollars. For European corporates in particular, those are always the hardest deals to work on because they're the most competitive mandates. But we've seen our share increase because we've invested in our capabilities in the US and also because we are giving the clients the best coverage and ideas overall and they're looking to reward us with the biggest and most important deals.
GlobalCapital: The dollar corporate bond market is dominated by the big US banks. What drew you into that in the first place? That's quite a beast to take on.
Hennebry, Santander: Our initial angle and competitive advantage was that we are a Latin American bank. In Latin America, every country has its own currency, but every country's second currency is the US dollar.
Our biggest clients across Brazil, Mexico, Chile look to issue in dollars almost as quickly as in their own currencies. We have been leading deals for the top Latin American corporates for a number of years, so we already have the sales, trading and syndicate teams in New York.
Our move to do the same for European corporates is newer — we did our first deal for a European corporate in dollars, I believe, in 2015 — but we've grown rapidly since then.
That we are already a big player in one niche of the US market helps us enormously.
It's interesting as well that a number of times we've found synergies across industries — metals and mining is the most obvious one, which is a very big industry in Latin America; it's also a very big industry in Europe. We've ended up with a very nice niche position in that industry. Likewise, in the oil and gas sector.
We've now also invested in our US client business. We did three deals in a row for Coca-Cola and we've led large deals for IBM.
The US business, as you say, is the hardest to break into. The five traditional US banks, plus a couple of Europeans, tend to dominate that business.
But we have found repeatedly that there is room in a syndicate for a bank that offers independent insight, a different perspective, a proper client focus and a message to the client that we are there to fight for them.
GlobalCapital: Corporate hybrids, AT1s, ESG structuring — they're all quite high touch, complicated things. Did you have to staff up in those areas?
Hennebry, Santander: It was really important for me to invest in content and high touch structuring, because I believe it's where you can earn outsized returns in DCM. It was also important for me to change clients’ perceptions of Santander, and to go in as a bank that was offering truly value-added solutions.
We had been present and relevant for some clients before then, but maybe not always leading their thinking. Increasingly, we are leading the thinking for key clients.
I grouped together all of those businesses. Previously, we had separate teams for each. I distilled this to just two teams: FIG solutions and corporate solutions.
Importantly, they are organised by client category, not product. So I encourage, for example, my liability management people to think about hybrids, my AT1 people to think about ESG, so that we're actually cross-fertilising ideas. We don’t just do high touch individual products but actually put these things together into high touch overall solutions.
It's amazing how many hybrid bond deals over the last three, four years have had liability management attached: exactly what we are set up for.
GlobalCapital: It's a classic move to go out and hire a whole team when you're trying to make a name for yourself in a particular market. You have hired individuals. How did you persuade people to believe in what you believe about Santander and what it could do, rather than for them to take the easier option of joining, say, the big US houses or whoever it might be?
Hennebry, Santander: So, crucial at the beginning of all of this was momentum. Whenever you're trying to build a business, momentum is important. In 2019 we focused very heavily on winning market share and getting the basics right.
Having fixed that, we were a much more attractive place for people to join in 2020. And there have been a whole mixture of people who have wanted a new challenge; people who felt that Santander had better growth prospects than their existing employers and a number of people who maybe had had different backgrounds or had done something different and wanted to come back into the banking industry.
You are right, hiring a whole team is a big step and you get everything new. But hiring individuals, if you do it right, can make an equally big difference. You just need to be sure every hire is the right hire.
GlobalCapital: You have staffed up a lot in FIG and SSA debt capital markets. The SSA business is, unlike the AT1 or corporate hybrid market, quite a simple one in terms of products — high volume, low margin, I suppose you might describe it as. That seems like quite the opposite strategy to the one you previously described.
Hennebry, Santander: If you look at a fee league table for European DCM, it's almost exactly equally divided into quarters — IG corporates, FIG, high yield corporates and SSAs.
Santander was present four or five years ago in corporates; not top 10, a bit outside it, but present. We were present in FIG, maybe around 20th. We were in high yield and SSAs, but only really did deals out of Iberia
Once the basics were fixed in corporates and we had a top five business, it became logical to move to FIG, which was our next biggest business.
Content matters even in SSAs, particularly around the green and ESG side
We have not, in fact, added net headcount in FIG. We have replaced some leavers by hiring ambitious, motivated people, many with bulge bracket backgrounds, who saw the potential of working here and who wanted the challenge. Abe Douek is the most high profile, given he joined to run it; a couple of years ago Anna D’Ercole, and just the other week, Johanna Israel. We also hired Vikram Gandhi on the FIG solution side just over a year ago.
We're also looking to grow the high yield business and we've started a lot of it with internal resource, and also hired a syndicate person who started two weeks ago.
SSAs, you’re right, is very different from the high touch business I described, but it's a very big part of volumes and the fee pool for DCM across Europe. If you have a full syndicate, DCM and sales team it makes so much sense to add the SSA piece to what you have.
Content matters even in SSAs, particularly around the green and ESG side. But you are right that it is different from other businesses. It is about high volume, trading, lead orders, being quick to move. It's a different atmosphere. But an exciting business that we want to be part of.
GlobalCapital: Can you tell us more about your plans in the high yield market?
Hennebry, Santander: We've been doing high yield for quite a while but almost entirely in Iberia. We started investing in the wider opportunity about 18 months ago — in high yield bonds, but also leveraged finance origination, sponsor coverage, and distribution.
So bit by bit, we've been building that up. We've seen massive progress on the high yield bond side. This time last year, Santander had been physical bookrunner on one high yield bond in euros ever. In the last 12 months, we've been physical bookrunner on seven. They've been a real mixture — clearly there were a number of Spanish names, of course, but also a number of names elsewhere in Europe: Faurecia, Gatwick, etc.
We're covering a lot more clients now and we are relevant with them and having very strong dialogues with them.
We've also been growing our US business. That's at an earlier stage but we're going from not doing anything about three years ago to now having a respectable amount of revenue coming in.
It's fair to say in the US, our business is principally about co-manager and passive roles. If there are stairs you have to climb to get to the top, we're at a lower step. But we are climbing steadily.
Our aim is to be at a point in all major currencies where we can be a left-lead or a sole lead on deals within a number of years. But equally, it's a market where it's important to grow sustainably and not to over-expand too early.
The riskiness of this sector means that if you try to run before you walk, you will make mistakes. We’re being very careful to crawl first, then to walk and eventually to run. We'll get to the running stage when we're very comfortable with what we're doing.
GlobalCapital: You suggested that bulge bracket experience was important. It’s another classic move to spend a long, formative period at a bulge bracket and then move into a more senior job at a smaller bank. Why is that bulge bracket particularly important to you?
Hennebry, Santander: It's important to have the right mix of experience. The experience people get at the bulge bracket firms is very useful.
There are a number of people for whom most of their experience was in Santander who we have looked to bring forward as well. Heading up corporate origination in Europe is Eric Bellanger, who has been at Santander over 12 years.
I like — particularly as we’re growing — that mix between homegrown and those coming in from outside. I would definitely not like to go too far to either side. Having all people who've been here already doesn't give you enough new blood. Simply bringing in a whole new team from outside I think would be completely wrong as well.
GlobalCapital: Going back to the SSA business, did you have to build up the bank’s infrastructure to be in the market — adding capabilities in, say, secondary trading?
Hennebry, Santander: Yes, if you want to succeed in SSAs, you must fix secondary trading first. There's no other route.
We hired Davide Percipalle a year and a half ago from Crédit Agricole. He got us to the point of being relevant in secondary trading.
We got our first ever EIB deals last year and a couple of co-manager roles for the European Union. And this year, we've done a couple of taps and private placements already, so starting from a low base we're making good progress. I hope and believe this is the year we'll see a breakthrough into doing more benchmark deals.
GlobalCapital: Have you been compelled to go down the primary dealership route to build this business?
Hennebry, Santander: We are a trainee primary dealer for Italy, which is one we have added to the mix.
We're already a primary dealer for Spain and Portugal, so there are a lot of synergies to adding Italy as well, because there's a lot of investor overlap.
Aside from that, we're a Gilt-Edged Market Maker in the UK and did three Gilt deals last year — far and away our best year ever.
And we're a primary dealer for Poland as well.
GlobalCapital: There are some big Asian investors that are very important to the SSA market. How do you deliver them to SSA borrowers?
Hennebry, Santander: We don't own a bank anywhere in Asia, but we do have offices for the corporate investment bank and sales teams. So we have full coverage of the big east Asian accounts in China, Taiwan, Singapore, Korea, everywhere.
Of course, there are banks that are bigger than us in that region — we completely see that — but we fully service those accounts and feel very comfortable that we can access them and deliver them in the context of deals.
The Latin American central banks are a smaller niche, but still a material portion of the overall SSA buyer base as well.
So, as with all these things, you try to find where you have a competitive advantage. You try to bring that to clients while at the same time looking to be relevant in all other areas.
GlobalCapital: That will help you grow a dollar SSA business too at some point. Is that your aim?
Hennebry, Santander: Santander has an ethos of pay as you go, or build step-by-step. The obvious place to start in SSAs was euros. The two steps that would be logical to take afterwards would be in sterling and dollars.
We've been doing euros now properly for 18 months or so. I think this is the year when hopefully we'll make big progress. And if that goes the way we want, then we will look to do more in the other currencies from there.
But Santander as an organisation are great believers that you succeed in Plan A before you move on to Plan B.
GlobalCapital: What are the bank’s goals overall in terms of its capital markets expansion?
Hennebry, Santander: We’re looking to develop a sustainable, leading market position. The same things I said about capital markets, I think are true more broadly. We are one of the biggest banks in Europe. We are one of the biggest banks in Latin America. We are a therefore a relevant bank also in US dollars. And we want to be relevant for our corporate clients. Across all of that we see a lot of opportunity.
We also see there’s a lot of receptivity from our corporate clients. We've had a number of cases where massive corporates have had a bank leave their bank group and the client then runs a process to see who they should add as a replacement. Repeatedly the bank they're looking to add is Santander because of our size, the quality of our people, our unique capabilities in Latin America and our ambition.
We see great opportunities in that. The capital markets are such a key part of corporate and investment banking but you can't build a business on DCM alone. That’s why project finance, trade finance, advisory and hedging are so important as part of a broad suite of products.