Birmingham, Alabama, is an unlikely beachhead for an assault on the U.S. banking market, but it suits José María García Meyer, the general leading the campaign on behalf of Spain’s Banco Bilbao Vizcaya Argentaria, just fine.
García Meyer was instrumental in building BBVA’s Bancomer subsidiary into the largest bank in Mexico over the past decade through opportunistic acquisitions and the application of the Spanish bank’s vaunted technology and marketing expertise. Now he’s determined to pull off a similar feat at BBVA Compass, the bank’s fast-growing U.S. unit, which he chairs. BBVA began dipping its toe into the U.S. market in 2004 with the $17 million purchase of tiny, six-branch Valley Bank in Southern California, then snapped up a few small Texas banks over the next two years. Modest beginnings, to be sure, but enough of a base to enable BBVA to gain real scale with the 2007 purchase of Birmingham-based Compass Bancshares, a regional with operations stretching from Florida to Arizona, for $9.6 billion.
“We started out with baby steps, buying small banks,” says the soft-spoken García Meyer. “The lesson from Mexico is that when the opportunity arose to buy Bancomer, we were already established in the country and we knew the market. The same thing is true with Compass.”
Today, García Meyer sees the U.S. as a true land of opportunity. BBVA is one of the few financial institutions to have weathered the global crisis with a healthy balance sheet and capital for acquisitions, at a time when the distressed American banking industry is ripe for consolidation. In August, BBVA Compass acquired Austin, Texas–based Guaranty Bank, a failed savings and loan, from the Federal Deposit Insurance Corp. The Spanish bank didn’t pay a penny for Guaranty’s $14.4 billion in assets; the deal requires the FDIC to cover 80 percent of the first $2.3 billion in losses at the bank, and 95 percent of any losses above that threshold.
Improbable as it may have seemed just a few years ago, García Meyer now finds himself running the 30th-largest bank in the U.S. by assets, with $72.2 billion, and the 25th largest by deposits, with $49 billion, according to FDIC data. The bank trails far behind $2 trillion-in-assets JPMorgan Chase & Co. on a nationwide basis, but BBVA Compass is a force to be reckoned with across the Sunbelt, ranking as the fourth-largest bank in Texas and the third largest in Alabama. Its 827 branches extend across five other states: Arizona, California, Colorado, Florida and New Mexico. And García Meyer’s appetite is far from sated. “Our goal is to create a new Bancomer here in the U.S.,” he tells Institutional Investor.
Achieving that goal won’t be easy. Many Old World institutions have tried to crack the U.S. market over the years, but few have succeeded. ABN Amro owned a big Midwest franchise in LaSalle Bank Corp., only to sell it to Bank of America Corp. in 2007 in a failed attempt to ward off a hostile takeover. Royal Bank of Scotland has a big U.S. foothold in Citizens Financial Group, a $148 billion-in-assets lender in the Northeast, but RBS overextended itself to acquire ABN Amro and is now downsizing to pay off a massive bailout by the U.K. government. Even HSBC Holdings, by far the biggest foreign bank in the U.S., ranking eighth overall by assets, with $369 billion, has taken a beating. The bank acquired the former Household Finance Corp. subprime mortgage and consumer lending business in 2003, only to suffer a staggering $24.4 billion in pretax losses over the past three years; it is now winding down the business to focus on conventional commercial banking in the U.S.
García Meyer needs to show he can wring consistent profits out of his operation. BBVA Compass accounts for 11 percent of its parent’s total assets, but generated only 7.1 percent of the group’s €12.3 billion ($16.5 billion) in operating income last year. After charging off €817 million in bad debts and taking provisions for an additional €533 million, the U.S. subsidiary posted a net loss of €1.1 billion in 2009; the red ink contributed to a 16.1 percent drop in BBVA’s earnings last year, to €4.2 billion. The bank aims to get 15 percent of group earnings from its U.S. subsidiary by 2013.
Some analysts doubt the wisdom of the bank’s big U.S. push, noting that BBVA paid a very high price for Compass — 18 times the bank’s earnings — just before the subprime crisis erupted and plunged the U.S. economy into a deep recession. “Even if U.S. returns eventually double or triple, they will not be very exciting because of the high entry price paid for Compass,” says Antonio Ramírez, a London-based equity analyst who covers Spanish banks for Keefe, Bruyette & Woods.
García Meyer defends the deal unapologetically and insists that BBVA is building for the long term. “You expect to pay a high price for an initial strategic investment in a new market,” he says.
BBVA has its roots in Spain’s Basque country. It was created by the 1988 merger of Banco de Bilbao and Banco de Vizcaya. In 1999, BBV added one more letter to its name with the acquisition of Argentaria, a conglomerate of former state-owned banks headed by Francisco (Paco) González, who became chairman and chief executive of BBVA. Under González, BBVA, like its larger Spanish rival, Banco Santander, has become renowned for a relentless focus on retail banking, strict risk management and the latest information technology.
After achieving dominance in its domestic market, BBVA, like Santander, began venturing into Latin America in the 1990s in a search for growth. “These banks were doing enormously well and were looking for opportunities abroad,” says Isabell Albus, the Frankfurt-based head of Spanish financials research for Allianz Global Investors, which includes both BBVA and Santander shares in its portfolio.
BBVA’s greatest foreign success came in Mexico — the country accounted for 32.3 percent of its total earnings last year. The bank first entered Mexico when it bought the troubled bank Probursa during the country’s 1995 financial crisis. Probursa hemorrhaged money for five years, but it gave BBVA the experience and confidence to raise its bet on Mexico by taking a controlling stake in Bancomer, then the country’s No. 2 lender, in 2000; BBVA would pay a total of $8.35 billion over four years to gain full ownership of Bancomer.
The Mexican bank had managed most of its products in separate categories and done little to, say, encourage checking-account holders to take out mortgages or credit cards. BBVA set out to break down those product silos and imported the technology and techniques it had honed in Spain to rev up Bancomer’s performance. BBVA managers grew Bancomer’s retail business by offering loans and other consumer products to employees of its corporate clients. Then Bancomer mined information on all products and services used by its customers — mortgages, consumer loans, credit cards — to increase the cross-selling ratio and monitor risks more closely. Today, Bancomer stands as the clear market leader in Mexico in both assets and profitability, having overtaken Citigroup’s Banamex subsidiary.
“Bancomer mirrored the U.S. business model for banking, with the same types of silos for products and services,” says García Meyer, who ran Bancomer’s branch network from 1999 to 2004. “We were able to transform Bancomer by implementing BBVA’s own model.”
BBVA then used its Mexican base as a launching pad to go north of the border. Its first move on the U.S. market, the purchase of Valley Bank, was deliberately small and cautious. BBVA’s initial strategy was to target low-income, first-generation Mexican-Americans and immigrants, and encourage them to use Valley for remittances to relatives back in Mexico. A similar rationale guided BBVA’s $850 million acquisition of Laredo National Bancshares, with 35 branches in Texas, in 2005. The following year BBVA broadened its Texas base by purchasing the 44-branch State National Bancshares for $480 million and the 77-branch Texas Regional Bancshares for $2.16 billion.
“They only make a new acquisition after feeling comfortable that the previous acquisition is under control and that they know the market,” says Angela Cruz, Madrid-based director for Spanish financial institutions at Standard & Poor’s. Rival Santander has taken a different approach in the U.S., placing all its bets on the acquisition of one troubled bank, Philadelphia-based Sovereign Bancorp. “It will take another two years to complete the restructuring of Sovereign and relaunch it,” says KBW’s Ramírez.
Having taken its first baby steps successfully, BBVA made a big leap with the additions of Compass and Guaranty. Those deals upped BBVA’s total U.S. investment to $13.1 billion to date. By the end of 2009, the group’s U.S. operations boasted more than 800 branches and $65.7 billion in loans.
But the high price paid for Compass continues to make many investors queasy about the possibility of fresh deals. “Any new merger or acquisition will have to be at very, very attractive prices if it’s going to get investor support,” says Alejandro Mínguez Ortíz de Barrón, a Madrid-based portfolio manager at InverCaixa Gestión, Spain’s third-largest mutual fund manager, which includes BBVA shares among its holdings.
Most investors would welcome another acquisition like Guaranty, though. The deal with the FDIC provided BBVA with a win-win outcome. The bank is protected from most potential deterioration of Guaranty’s assets, and BBVA paid nothing for its deposits. If Guaranty’s entire loan portfolio went bust, BBVA would be liable for only $500 million in losses. That means that in the worst-case scenario, BBVA would have paid $500 million for Guaranty’s $11.7 billion in deposits — a modest 4.3 percent ratio of acquisition price to deposits. By contrast, BBVA spent $9.6 billion for Compass’s $33 billion in deposits — a 29 percent ratio.
“If BBVA is really going to be a profitable, long-term investor in the U.S., it has to add more assets like Guaranty and that way average down the price paid for Compass,” says Iñigo Vega, a partner in Madrid-based Iberian Equities, an independent brokerage. “And secondly, BBVA Compass has to create a larger-scale operation to reduce its cost base and achieve more synergies.”
The deep U.S. recession boosted loan losses at BBVA Compass and pushed the bank into the red last year, compared with net income of €211 million in 2008. Some analysts expect the bank to earn just half of the €600 million target it has set for 2010.
García Meyer is confident that BBVA Compass can make rapid strides in efficiency and profitability, given the parent bank’s success in Mexico and Spain. BBVA Compass has a cost-to-income ratio of 55 percent, much higher than BBVA’s 35 percent ratio in Spain and Bancomer’s 31 percent. The executive also believes BBVA Compass can boost its current rate of selling 1.7 products for every client, on average, to levels closer to Bancomer’s 3.2 products-per-client ratio in Mexico and BBVA’s 4.2 ratio in Spain.
What excites BBVA executives even more than potential efficiency gains at Compass is the macroeconomic picture in the Sunbelt: the region stretching from California to Florida that is the fastest-growing area in the U.S. The Sunbelt accounts for 7.6 percent of world GDP, compared with 2.6 percent for Spain and 1.8 percent for Mexico. Income per person averages $47,000, compared with $35,000 in Spain and $10,000 in Mexico. “So a lot of things are possible in the U.S. market,” says García Meyer.
One of his medium-term goals is to achieve more balance between retail and corporate banking. The latter accounts for 70 percent of revenues, compared with just 21 percent in BBVA’s Spanish and Portuguese subsidiaries. BBVA Compass’s corporate banking division, headed by Rafael Bustillo, is currently working to reduce the bank’s exposure to real estate — the sector hit hardest by the crisis — to 50 percent from the current level of 60 percent. The other half of the loan portfolio is earmarked for commercial and industrial clients. “In the last year we have seen our real estate outstandings decrease while the majority of our new loans — in excess of 85 percent — are in the commercial and industrial sectors,” says Bustillo. Thanks to the deep pockets of BBVA, its American subsidiary can now offer corporate loans up to three times as large as the $35 million limit that Compass applied in the past. Bustillo cites a loan of more than $100 million made last year to a Texas oil-and-gas company.
BBVA has also tightened risk controls at Compass. Every loan is reviewed by the risk management committee annually — and several times a year for loans of $1 million or more. Imitating BBVA back in Spain, its U.S. subsidiary began in June 2008 to tag its corporate loans by color, according to whether it intends to provide further credits to a client. “If we want to see the relationship grow, it’s a green,” says Bustillo. “If we just want to maintain it, then it’s a yellow, and if we want to exit, it’s a red.” No matter what the color, if a corporate client is five days late, the bank will contact the company by phone, but won’t give it many more warnings. “We usually don’t carry a loan 30 days past due,” says Bustillo.
In building its corporate bank, BBVA Compass has repeatedly emphasized the synergies it hopes to achieve between clients in the U.S. and Mexico. BBVA has global expertise in trade finance, a business in which midsize U.S. banks like Compass weren’t active. “We are also helping Bancomer customers who want to invest in the U.S.,” says García Meyer. But BBVA Compass doesn’t include in its financial results a breakdown of the contributions to its bottom line from cross-border business. And some analysts remain unimpressed. “They still have to prove that they can produce these cross-border synergies,” says Allianz Global Investors analyst Albus.
Meanwhile, back on the U.S. side of the border, BBVA Compass is trying to lift its retail banking activity to the level of its corporate business. Before being acquired by BBVA, Compass had barely invested in technology. At most branches the tellers had no computers, only old-fashioned adding machines. “They couldn’t even provide a customer with a balance online,” says Shelaghmichael Brown, head of retail banking.
That’s still the case at many branches in downtown Birmingham, where BBVA Compass’s glass-sheathed headquarters rises 19 stories above the historic district. Now economically blighted, this neighborhood of stone-and-brick buildings once housed businesses linked to the early 20th-century steelmaking boom. Today a higher-tech future is on display at the BBVA Compass branch in Cahaba Heights, an affluent suburb seven miles east of Birmingham. There, incomes and housing prices seem to rise with the rolling hills and tall woods. Across from an upscale shopping center anchored by a Saks Fifth Avenue store, a red-brick, one-story BBVA Compass branch has recently completed a remodeling and expansion that has almost doubled its floor space.
A new teller system is being installed that is a technological leap from the late Gaslight Era into the 21st century. Cutting-edge ATMs have imaging capability that enables up to 15 checks to be deposited at a time, with their individual images captured digitally for instant display to the client. A new “virtual banker” system allows customers to sit at computer terminals and videoconference with a financial specialist at another branch if one isn’t available on the premises.
Not all the changes involve high-tech IT. Under a “customer-experience” scoring system introduced at the Cahaba Heights branch, clients are interviewed and asked to rate the way they were treated by employees. “It has changed behavior,” asserts Brown. “When we started six months ago, there was no way to go but up.”
Efficiency and service should eventually pay dividends in retail banking, but first BBVA Compass has to get through the recession. Home equity has dried up throughout the Sunbelt. Because entire broker networks have disappeared, the bank has been forced to participate more directly in its mortgage operations. “We saw about a 60 percent increase in our origination volumes in 2009 and expect a similar increase this year,” says Brown. “But it doesn’t mean the market is expanding — there are just fewer brokers.”
Credit card activity is also flat, pushing BBVA Compass to come up with imaginative promotional tactics. Betting that the University of Alabama would claim the national football championship, the bank issued a “Bama” affinity debit card just a few days before the team won the title game in January. The bank also emblazons BBVA Compass Visa cards with team images for students, alumni and other fans who just can’t get enough of their Crimson Tide. Demand for the card remained strong enough weeks after the championship game that branches like the one in Cahaba Heights continue to peddle it at separate counters near their entrances. “Our research shows that college football is one of the best customer acquisition tools,” says Brown.
While waiting out the recession, BBVA Compass is looking toward new acquisitions at the western edge of the Sunbelt — in California. Although two thirds of the bank’s business is in Texas, the Guaranty acquisition brought 66 branches in California. These account for a minuscule 0.3 percent of that state’s market, but it’s a start all the same, says García Meyer: “Guaranty has opened an opportunity to test the waters in California.” What’s more, BBVA Compass won’t necessarily confine its future expansion efforts to the Sunbelt or to troubled banks put up for sale by the FDIC. “We will go ahead with potential acquisitions in markets where the demographics look good for us,” he says.
Despite market skepticism, García Meyer insists that BBVA Compass can eventually contribute 20 percent or more of BBVA’s total income, a level comparable to that of Bancomer. “Again, I look back at our experience in Mexico,” he says. “It was important to be there at the right time in order to acquire Bancomer, and it is just as important to be in the United States at the right time.”
What’s Spanish for “chutzpah”?
