Abbey climbs Spanish steps

WHO better to end the Spanish practices in Abbey National's back office than Banco Santander Central Hispano?

Indeed, if the computer architecture claimed by the £8.9bn predator is as good as it is cracked up to be, large numbers of Abbey backroom staff will be looking for new jobs and Britain's domestic banks could find themselves up against a competitor that is a real threat.

It would have been much better for Abbey's regiments of private investors (four times more than at Marks & Spencer) if ex-chief executive Ian Harley had not dropped the ball when the former building society was under siege in 2001 and accepted an offer worth almost twice as much. But given the trauma which Abbey has been through over the past few years, including losses of £1.6bn, the Santander offer will seem to many like manna from heaven.

Unlike a British bidder, SCH will not be able to do what Royal Bank of Scotland did at NatWest and take a meat axe to costs through domestic rationalisation. The Spanish bank will have to deliver value to its newly-acquired shareholders by simply being better than Abbey at serving customers using the most modern IT. This will result in up to £375m of cost savings by year three.

Before we become all dewy-eyed about Santander, it is worth reflecting on its thinking. There are several good reasons why the sainted Emilio Botin, the SCH chairman, has set his cap at Abbey.

Firstly, Britain is by far the easiest European banking market to break into. There is none of the nationalism of France, the dual board requirements of Holland and Germany and the incestuous shareholdings of Italian banking to break down. In fact, our competition authorities have tied themselves up in such knots that we have almost been willing an overseas buyer to come in. That is why it looks increasingly likely that Santander will be the first of several invaders casting their eyes at the lucrative British market.

A second good reason for Santander's offer is that it is underweight in the developed world. For too long the Spanish banks have looked to South America to drive growth. But emerging market economies are notoriously unstable and this has brought with it a cycle of losses and write-offs to Santander and other Iberian banks. Abbey offers the chance post its wholesale and insurance adventures to provide some stability to the new parent.

One problem for British institutional shareholders thinking of swapping Abbey shares for Santander paper is the new potential owner's governance.

Santander is a bank dominated by one family, with a relatively small shareholding of less than 3%. The board may be decorated with senior executives from the great and the good of Spanish business, but in the end it is a one-man show.

It took years for Barclays to cleanse the family influences from its boardroom. Now we are allowing a Spanish bank, with a dominant dynastic tradition, on to the High Street.

Despite all this, we must regard the deal as a good thing. For too long our banks have operated in a cosy environment where it has required the intervention of government to shake up the small business and credit card markets. Profits are not voluntarily disgorged.

It is unreasonable, for instance, that a bank as customer-focused as HBOS, with its interest paying current accounts, is in 2004 proposing to add an extra two days to cheque-clearing for low income customers, bringing it to six days.

If Don Emilio's IT executes as promised, then the other High Street banks could well feel the hot breath of competition on their neck. What was always on the cards is that Abbey, with Luqman Arnold and Stephen Hester in charge, would eventually be sold. For all their talk about finding new customer-focused paradigms and the rebranding of branches at Abbey, both were investment bankers not consumer champions - and investment bankers are good at selling companies, not running them.

It now turns out that Hester already was on the move even before Santander came on to the scene and is to try his hand as chief executive of British Land. This is second time lucky for BL chairman John Ritblat, who lost his previous choice, Philip Yea, to 3i.

Like all investment bankers Arnold, who stays on, and Hester who goes, will benefit handsomely from the bid with the former collecting up to £3.3m.

The pair can claim to have sorted out the mess they inherited and to have restored Abbey to the black, with half-year profits of £350m from a £144m loss last time, before putting up the for sale sign. Better that than payment for failure.