Sovereign Bancorp Inc. chief executive Joseph P. Campanelli concedes that even after a year and a half of restructuring, Sovereign still has some work to do to prove itself.
But most of "the heavy lifting is done," he said. "We are an extremely different company, a totally different company than we were a year ago."
In an interview last week at his office in Boston, Mr. Campanelli ticked off several changes for the better: a new management team, progress in retail banking thanks to the Customer First campaign, and a stronger balance sheet and risk management profile.
If Sovereign continues to make strides, being smaller and nimbler could allow it to satisfy shareholders pushing for better returns, without giving in to demands that it sell itself. "Now it's all about execution" rather than strategy, he said.
Sovereign's bid to upgrade service in a branch network that stretches from New England to Maryland is paying off, the CEO said. Last month Sovereign bankers sold almost twice as many products per week through its 750 branches than in April 2007.
"For the first time in two, three years we have stopped the net outflow of accounts," Roy J. Lever, Sovereign's head of retail banking, told shareholders during its annual meeting on May 8 in Brooklyn, N.Y. (Sovereign, which officially is headquartered in Philadelphia, rotates the site of its annual meeting.)
Moreover, Mr. Campanelli said, Sovereign is "well along" in the credit cycle. "The debate is, are we in the sixth inning, or the eighth inning?" The relatively healthy Northeast economy has helped in this regard, as has Sovereign's relatively low exposure to residential construction.
Still, "We've got to continue to build credibility," Mr. Campanelli said in an interview after the annual meeting. "We are a new management team. Historically, we may have overpromised and underdelivered. I am a guy who underpromises and overdelivers."
Some stockholders and analysts have not shared Mr. Campanelli's optimism.
John Murphy, the head of the Bay State Federal Savings Charitable Foundation in Cambridge, Mass., which owns shares in Sovereign, said in an interview Friday: "I see regression" rather than progress. He called the continued credit-quality deterioration particularly in auto lending "absurd" and Sovereign's expansion of that business "blind."
During the annual meeting, one shareholder said, "I don't want to sit here year after year and get the same old story about how you incentivize the tellers to open more accounts when your stock is goes down further." He demanded a share buyback, or a sale of Sovereign to Banco Santander SA of Madrid, or another company. In 2006, the $1.2 trillion-asset Santander acquired a 25% stake in Sovereign and has an option to buy the entire company. "
When asked about Sovereign's independence during the interview in Boston, Mr. Campanelli said: "We have options. If we execute, if we grow capital, we don't need a bigger balance sheet. There are a lot of small banks that compete effectively."
He carefully sidestepped questions about the possibility of Santander's acquiring all of Sovereign. "They are a major investor, as are many people," he said. "We want to prove to those investors that they were very wise to put money in us."
Sovereign's two-year-old deal with Santander is complicated. Under the so-called "standstill agreement," Santander cannot increase its stake in Sovereign until next month, unless invited by Sovereign's board to do so. Sovereign's chairman, P. Michael Ehlerman, said during the annual meeting that no such invitation had been extended. Next month, however, Santander can make an offer to buy Sovereign outright, though at a hefty price. It must bid about $38 per share, adjusted for the dilution of a $1.9 billion equity offering this month to replenish its capital levels. However, all that changes by mid-2009 when the floor for the stock price goes away. Sovereign's shares closed Friday at $8.51. The stock is down 25.4% this year, after a 55.1% slide in 2007.
At Sovereign's shareholder meeting, Gonzalo de Las Heras, the head of Santander's U.S. business and one of two Santander directors on the board, told the shareholders that his company had not decided how it would proceed. "We will see what is best for everybody" after the standstill agreement ends, he said, and left it at that.
Mr. Campanelli said he does not expect things to change next month. "Given the financial landscape and the fact that we just did a capital raise, I don't think that date brings much change in anybody's position."
A Sovereign, it is "not about positioning yourself for a sale, or positioning yourself for being an acquirer," he said. "The attitude is: Fix the operation and the execution."
Acquisitions will not be part of that fix, he said. Though Mr. Lever and Mr. Campanelli have made it clear that Sovereign wants to expand in New York — particularly Manhattan, where it has only 15 branches — Mr. Campanelli said it does not plan to enter new markets."We have not demonstrated that we have earned" the right to do an acquisition yet," the CEO said.
Last year the company reported a $1.3 billion loss, compared with a $137 million profit in 2006. Much of that loss was tied to a $1.6 billion loss in the fourth quarter, when the company took charges for goodwill impairment and deteriorating credit quality. However, for the first quarter Sovereign generated a $100.1 million profit, more than double that of a year earlier.
Mr. Campanelli acknowledged he made some mistakes after first taking over as CEO from Jay S. Sidhu, who lost a boardroom struggle in October 2006. Mr. Campanelli took over as interim CEO immediately (the "interim" was removed from his title in January 2007). In mid-2006, Mr. Campanelli started to expand auto lending beyond the markets where Sovereign had branches, which proved to be a bad decision because it has damaged the company's credit quality. Mr. Campanelli said he is "rightfully" criticized for that strategy, which had roots in his earlier career. He joined with Sovereign's 1997 acquisition of Fleet Financial Group's indirect auto lending business, which he had headed. In 1999 Sovereign extended its reach to New England by acquiring 268 branches from Fleet. After the Fleet branch deal, Mr. Campanelli became the head of Sovereign's New England operations, which also included auto lending and Sovereign's other specialty lending businesses.
He said an expansion into the economically attractive Southeastern markets was "well thought out" but came at the wrong time and was badly executed. "The speed at which it grew should have been curtailed," he said. "We made a mistake. We are not going to find a way to sugarcoat it." He said, "I sleep at night because I know that the risk controls that we have today would not allow that to occur again."
Risk functions now have better analytics, and thresholds are in place to "make sure no one business goes over." Risks are also flagged sooner. Other back-office changes include more controls, more financial discipline, and more profitability measurements — from executives all the way down to every teller, Mr. Campanelli said.
While allowing that some of his moves haven't worked out, Mr. Campanelli says several steps he took right after becoming interim CEO have been successful. He pledged to stay away from acquisitions, which had been Mr. Sidhu's favored method of expansion. He also reversed Mr. Sidhu's strategy of decentralized decision making in retail banking. And Sovereign slimmed down its balance sheet, shedding securities.
Analysts and investors applauded those changes, and Mr. Campanelli said he believes his quick actions got him the CEO job.
At least one of Mr. Sidhu's strategies remains: Sovereign's transformation from a traditional thrift to a commercial banking company. But commercial lending — and the decision to sell securities — has tipped Sovereign's balance sheet too much to the commercial side to stay in compliance with thrift regulations. It regularly needs to add leverage its balance sheet to keep the size of the commercial loan book in check. Mr. Campanelli said he would not curb commercial lending to remain in compliance with the Office of Thrift Supervision. "You never change your business model around a regulatory charter," he said.
Little is left of Mr. Sidhu's last big idea: A plan to focus on Hispanic customers and college students. That initiative was promptly folded into Sovereign's overall strategy to tune up retail banking. "Historically we were very entrepreneurial," Mr. Campanelli said. Now "we are a somewhat more boring company."
Boring works, Mr. Campanelli and Mr. Lever said, citing an effort to sharpen retail service. In January Sovereign expanded to all branches a pilot program it started in the fourth quarter. The program lets bankers and tellers identify customers who did not have a Sovereign-issued credit card or savings account and business customers using Sovereign's cash management services who did not have a checking account. Since then Mr. Lever has set targets for employees to sell those products and attaches a specific dollar value to each one, which Sovereign then adds to the employee's base salary. Salaries for branch employees are now entirely based on individual performance.
"Right now we are generating in excess of 6,000 [new] accounts a week," Mr. Lever told shareholders during the annual meeting "The typical run rate at Sovereign has been somewhere between 3,500 and 4,500." In the first quarter full-time Sovereign employees sold an average of 6.3 products a week, up 80% from a year earlier. "In the first three weeks of April, you see a 10% lift" even from first-quarter results," to 6.9 products. Credit card applications generated through branches jumped to 32,000 in the first quarter, from 1,250 a year earlier. Retail checking and savings account deposits rose $90 million in the first quarter after falling $189 million a year earlier. "This is starting to work," Mr. Lever said.
But Bay State's Mr. Murphy said: "When you go into a Sovereign branch you don't really get what they are talking about of customer experience. I go into two or three once every couple of months, and it's very cold, you don't have anybody greeting you."
Collyn B. Gilbert, an analyst with Stifel, Nicolaus & Co. Inc., said she sees progress at Sovereign. Its first-quarter results were not as noisy as its results throughout 2007, and though the retail banking turnaround has yet to show tangible results, she said she expects to see further progress later this year. "I probably have more conviction that they are heading in the right direction than I've had in a long time," Ms. Gilbert said.
