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Tarnished banks face new competition.

Tarnished banks face new competition

If Santander's Emilio Botín, had retired at the age of 65, he would have missed the perhaps the most successful years of his career.
Now aged 75, he has steered the bank of which he is executive chairman through the worst international financial crisis for three generations, to emerge as a significant force in global banking.

Following acquisitions in Brazil, Mexico, Chile, the USA, Germany, Italy and Britain - where the bank has added Alliance & Leicester and the deposits and branches of Bradford & Bingley to the Abbey network it bought in 2004 - Santander today claims to have achieved "leadership positions" in 10 markets it considers to be key. As a result, it is less vulnerable to economic weakness in its home market of Spain.

Ironically, the fact that Spain has suffered four big banking crises over the last 40 years has also helped Santander. In Financial Times October 2009 issue, Mallet points out that these crises caused the Bank of Spain, the industry regulator, to insist on caution for the banks in its care. Santander, like other Spanish banks, has therefore tended to focus on traditional retail and commercial banking rather than riskier investment-banking operations.

Botín insists that the bank has "absolutely no need" to make further acquisitions. But Mallet points out the fast-growing Asian economies are "an obvious gap in the group's international network". He concludes: "Given Santander's ability to generate capital from its annual profits, and Mr Botín's record as predator, few would be surprised if he set his sights on new prey."

Santander is not the only bank to emerge as a competitor to the retail banks long established in the UK market. Customer dissatisfaction with existing institutions, and their tarnished image in the wake of the banking crisis, is creating opportunities for new entrants - and particularly banks that are extensions of existing, trusted brands.

In Volume 160, Issue 1008 of The Banker, Price highlights the arrival of three such banks: Virgin Money, which is the personal-finance subsidiary of the Virgin Group; the UK Post Office, which has unveiled plans to capitalize on its brand and infrastructure by launching what it calls a "people's bank"; and Tesco Bank, which is based on the UK supermarket and already offers 28 personal-finance products through its Tesco Personal Finance joint venture with the Royal Bank of Scotland.
According to Price, it remains unclear whether many new entrants will be able to develop a sustainable, cost-effective model. Analysts believe that new banks may initially find it hard to attract enough deposits to fund their lending. They would then have to turn to the wholesale funding market, which can be risky and expensive. Infrastructure costs, technology issues and limited growth opportunities may also prove to be problematic.

But UK finance minister Alistair Darling is known to favour the arrival of new entrants in order to boost competition and reduce the risk of there being banks that are too big to fail.

Price believes that Virgin Money, the Post Office and Tesco may simply be the first wave of new entrants. If this is the case, the established banks may yet have reason to worry.