Santander Consumer Finance (SCF) Case Analysis
Florida International University
Antonella Lados
FIN 4604
Dr. Julia Chou
11/26/2018
Santander Consumer Finance (SCF) Case Analysis
Please describe and evaluate the Country/Political Risk faced by this organization and describe its successes and failures.
Globalization has brought with it many benefits and challenges. For that matter, finance leads the way for globalization; it is because of the global financial system that individuals and institutions from different countries can interact and transact beneficial deals. SCF is a giant in consumer finance, especially in Europe, and as the case details indicate, it has had its own fair share of successes and challenges (I would prefer to call them challenges rather than failures). Given that SCF has operations in the entire Europe plus a host of other North American and South American countries, country specific challenges are inevitable. For instance, each country has its own approach to finance and banking depending, mostly, on the culture and level of advancement in finance. In Belgium and Italy, consumers are inclined more towards saving than obtaining credit, in England revolving credit cards are a fad, and in Germany bank overdraft seemed common. These differences present varied propensities and thus appetite for SCF financial products. Therefore, the greatest risk by SCF was its relentless drive to grow into many countries in light of these demerits. Thus, the regulatory, cultural and natural differences in the countries of operations present unforeseen risks which can cripple SCF but in its stubbornness, it persists.
As a result of its resilience, SCF is among the greatest finance institutions in the world by market capitalization. At the same time, it has been able to wield influence in the European market and given the future projections in consumer finance it is strategically positioned to reap huge. SCF's’ strategy of partial decentralization is one of its strengths in ensuring that it adopts quick and fast in the locally-diverse markets. Given the heavily regulated European market, to be able to maneuver and establish a brand presence as well as create a new notion (even on a smaller scale) about consumer finance is a huge step by SCF towards greatness and success.
What has been the lending strategy followed by Santander? Are lending decisions based on the credit background of the borrower, or on the riskiness of the venture? How do they manage risk? How do they finance their loans? Why is there so little cross-border borrowing?
The lending strategy by SCF was primarily car loans; however, this has since evolved into a more multi-pronged approach further tapping into durable loans. Most important however, is that SCF adapts their lending strategy to each specific country. The differences in perception to lending is what informs SCF strategy. The auto loans have been and still remain the biggest source of revenue for SCF. Within the auto loan approach, SCF diversified its strategy to ensure that they compete healthily with the car manufactures. For instance, they did not intend to compete on captives for new cars but were really in the show when it came to financing purchase of used cars.
Irrespective the country and the amount of credit/finance data available about the consumers, SCF still follows the cardinal rule in lending; which is to try and track the borrower’s credit history. At best, the car dealerships were best in making this fast indirect contact and thus provided SCF with invaluable information regarding the credit worthiness of potential clients. The good thing with SCF is that it has its own models to assess risks for lending in different situations. At best, SCF manages its risk by decentralizing only those functions that require location specificity. Functions such as Funding, a portion of customer data, IT functions and some other few are centralized back in Spain. On the other hand, SCF is able to finance its operations from senior loans, commercial papers, customer deposits, and asset-backed securitization. The reason for little-cross border borrowing is rooted in the cultural differences that dictate tastes and preferences in borrowing as well as the heavy regularization on finance in Europe. Simply so, the consumers preferred local proximate providers to foreign multinationals like SCF. Even with the existence of the European Union, market fragmentation in Europe is so deep and the case authors estimate no changes in regards to low cross-border borrowing in the near-future.
How is the lending strategy different to US commercial banks?
The consumer credit market in the U.S was much bigger and more established than in Europe. There are more people using credit facilities in the U.S and have accepted this as a normal way of life. The credit institutions like Drive in U.S have been mentioned in the case as providing SCF with a clear perspective on how an established consumer credit market would look like. Actually, the case sites that nearly 51.5% of the consumer lending is done in the America and only 30% for Europe.
At the same time, lending in Europe was far less risky than in the U.S. This is because majority of borrowers in Europe prefer sub-prime products. Actually, the U.S borrowers depended more on revolving credit and this is seen only in the UK when it comes to Europe. At the same time, the interest rates in the U.S were adjustable (discriminatory) to individual risk; in Europe, the interest rates are fixed, even those offered by SCF.
As a consultant to the CEO, what would you suggest Magda Salarich do now? Please obtain, identify and evaluate the data and conduct a multi-perspective analysis of the evidence to make a logical recommendation for solving the problem with a global perspective.
Corporate sustainability is a critical matter in the modern corporate world. The case of Enron’s collapse in 2000 is a clear reminder that a firm might be doing excessively well today but there is a possibility that it can go under tomorrow for various reasons. Therefore, for Salarich, it would vital for her to make accurate and precise assessments in light of the existing data. Going by the financials presented in this case the conclusion is would be that SCF is very solid and on a growth trajectory. The continued shining of SCF is evidenced first by the series of acquisition starting with Bankhaus Germanyin 1987 to recently Chile in 2007 (Exbt. 2). At the same time, Exbt.1 shows a steady growth of SCF in terms of assets and customer loans which has spiraled up shareholders’ equity. In all respects, the operating margin has been increasing steadily and thus maintaining such a trajectory of growth would require a proper forecast and prudence.
Salarich should propose a continued consolidation effort of the existing markets in Europe. The Europe’s consumer credit market is still growing and thus has a great potential for better returns in future. Markets like Italy and Portugal have a great potential for SCF’s products and thus should be consolidated further (Exbt.3). This shall ensure that the lending activities are maintained and grown in Europe. However, Salarich should advice the executive to insist on the Latin America market which has shown an incredible response to SCF’s products (earning SCF a gross operating income of 10,386 million Euros in 2007 Exbt. 1). In addition, Salarich should advice SCF executive to amend its strategy on centralization in order to allow for more flexibility by specific country managements. In the long term, SCF should look into the growing consumer market in Asia and start taking on the advantage of a global fad in borrowing.
References
Arslan, Ö., & Karan, M. (2010). Consumer Credit Risk Characteristics: Understanding Income and Expense Differentials. Emerging Markets Finance And Trade, 46(2), 20-37. doi: 10.2753/ree1540-496×460202
Johansson, A. (2011). Financial Markets in East Asia and Europe during the Global Financial Crisis. The World Economy, 34(7), 1088-1105. doi: 10.1111/j.1467-9701.2011.01366.x
Trumbull, G., Corsi, E., & Barron, A. (2010). Santander Consumer Finance [Case study]. Boston: Harvard Business Publishing.