Julio Fermoso García President of Caja Duero

Spanish financial analysts are concerned about two significant matters, the low level of competitiveness and the external deficit. They say that R&D is the magic formula in order to solve these problems. Do you think that the appropriate conditions are being created for companies to invest more in R&D&i in Spain?

I think what the diagnosis says is that it is a multifactor problem and that there is no single cause. Our cultural and historical character is of fundamental importance. Major modifications to an economic reality, or new directions do not come overnight, they are slow processes. It is true that we have been historically late in supporting R&D. I come from the academic sector where the sentence "research means to cry" is a given truth. Research support has always been horribly neglected.

When Miguel de Unamuno said "let them invent", he meant that we had to contextualise and prioritise. He said: "electrical light shines here the same as it does in Germany", so let them invent light. All we had to do then was to take their invention into our homes. Firstly, let's increase literacy, stop malnutrition and disease, only then should we devote ourselves to invention. Meanwhile "let them invent". We must know our origins.

Since then, Spain has grown tremendously and we are still doing so, clearly above the European average. Nowadays we cannot carry out competitive devaluations in order to be able to export, which we did in the past. We cannot stack the deck anymore. Therefore, what is our priority now? To become more competitive, but how? That is something that will take time.

We have been hiding R&D expenses within the Defence budget. This expense has not increased for a variety of reasons. We had a period of growth in the 80's that came to an almost total halt in '92 at the end of the Seville Expo and Barcelona Olympics. There had been a progressively greater investment in R&D but we have yet to recover from that standstill.

Strategically it is extremely important to solve this problem which at least has been clearly defined. Investment in R&D must increase; small and medium companies must receive support because they are the ones able to raise R&D expenditure. Multinationals already have this area covered.

Competitiveness cannot be increased overnight either. It is important to realise that we are at the back of the queue in New Technology, household internet access, wireless connections and usage of any of the platforms that support and provide wealth to the modern world. It is not good to compare, but I am convinced that we are far behind. Our location in Southern Europe inevitably leads to comparisons with Greece and Portugal, but the truth is we are even behind Portugal. Where would we like to be? We want to be in our rightful place, to get away from those lagging behind. To do so, we must support investigation and technology as soon as possible. A country which invests in research does not spend, but rather sows seeds for the future. Some governments have realised this, as the percentage of their GNP earmarked to R&D&i clearly shows. This has not been done here as yet because it does not give short term returns. Companies plan strategy for a given period of time, evaluate its progress, analyse the reasons behind it, measure its viability and put it into practice. However, what companies do not do is plan strategy for periods of thirty years. Politicians only plan for four. This can only be solved by a commitment which gives priority to other factors. For example, when citizens are surveyed concerning how they view Savings Banks, and asked whether they would like us to invest in R&D, the percentage of affirmative answers is very low. Politicians are aware of that. People want infrastructure. Clearly they prefer to improve the management of their Autonomous Community. Investment in research is not important at all.

Another tool of the Spanish economy is to attempt to increase direct foreign investment. Do you think that Spain is no longer an attractive country for investment? Or has the situation changed?

I believe the important thing is to see what our priority is and what needs doing. Foreign investment is a good thing and the fact that our entrepreneurs invest abroad is positive too, since we are living in a globalised world. This leads to the great development paradox. It is cheaper for some multinationals to build furniture in the third world paying shameful salaries. A country's development has positive aspects; salaries are higher, which leads to greater social wellbeing but then businesses go elsewhere. Nonetheless, we must find those niches that can still attract investment. To do so, the technological sector must be more fully developed. Supporting R&D&i opens doors to new investment because it is a field with no borders. We do, however, have service and tourism sectors which must be redirected. It does not have to be simply sun and sand, but tourism must continue as it is very positive for the country. Thousands of foreigners come to this European Florida to buy a second home and, in doing so, stimulate our economy. What is needed though is culturally-linked tourism for the interior of the country as well. With the necessary infrastructure I am convinced that this type of project would attract foreign capital because it brings good returns and is new. Cultural tourism is better developed in Northern Europe although Spain is now progressing in this respect.

Let's talk now about Savings Bank, financial entities which have grown 15% in the fiscal year of 2004. In general terms, why do you believe Savings Banks have grown so much over the last few years and have now come to be a major player in the Spanish banking system?

Savings Banks are the major player at this moment and this is principally due to good management, and perhaps to their system of continuous evaluation.

Savings Banks used to have a weak system but thanks to people of vision, such as Juan Quintás, President of the Spanish Savings Banks Confederation (CECA), they have survived here unlike in other countries. After the ironclad hold during the dictatorship, our savings banks underwent a rebirth. At first they had little credibility, but I see them as the precursors of Corporate Social Responsibility (RSC). Since they are very local, in close contact with the consumer and the rural environment, little by little they gained people's trust. Except for the biggest savings banks, they are all of rural origin. We supervise mortgage viability and prepare thousands of people's Income Tax Returns for free. These are things which generate confidence whereas the rest of the banking system has used returns as its only parameter, fleeing the rural environment as much as possible.

Therefore, the main reasons for savings banks success are good management along with the affection and trust that must be cultivated day after day. There are reasons for our customers' loyalty. We have a system in which we can be proud but we must be watchful as well as it is under constant threat. Through the vision of people such as Juan Quintás, we are breaking paradigms or deeply rooted, obsolete archetypes.
Savings Banks are an exemplary model but only a few remain: the ones here in Spain, a few in Germany and in Norway, I believe.

Now that you are leaders of the Spanish banking system, the Savings Banks new objective is to surpass private banks in efficiency as well. How would you rate Caja Duero's efficiency and what measures are you taking to increase it?

As I said before, a strategic plan is for a limited time but it does not have to be just two years. A very small savings bank can only be proud of its small size, of its very close relationship with its customers and its great efficiency. It is true that we are not as efficient as private banks. This will improve but not in the next two years. We are now in a growth period because our volume of business was low and our strategy is to increase it with a phase of major expansion. During a phase such as this we must wait for the time to be ripe. Additionally, private banks do not have to fulfil the social service that we do, and our truly social service means being in places where it is not financially sound to maintain an open branch, yet we are there. Caja Duero will celebrate its 125th anniversary next year and these are the reasons for our growth. In the year 2005-2006 we will have a total of 123 branches. We have doubled the volume of our business in Andalusia over the last ten months. We are in Andalusia, in Madrid, in Eastern Spain, and other places where we see business opportunities. Meanwhile our market share in Castile-Leon remains steady.

Should this effort to serve rural, sparsely populated areas be considered part of Caja Duero's social responsibility, making sure that unprofitable areas have financial services?

It is amazing to see the difference there is between a financial office of a savings bank and a private bank. When a farmer parks his tractor at the door and we begin to talk and find a solution to the daily problems he faces, such as his crop's financing in times of drought like the one we are undergoing now. All the family's finances, for the farm, for day-to-day expenses, for future investments, for the children's education are handled by the savings bank. The relationship is a close one not to be found in any other banking entity.

Savings banks investment policy may undergo changes due to the new International Accounting Norms (NIC). In terms of Caja Duero and its share in industry, what investment strategy do you propose for the future?

At the moment our stake in the Business Group is lower than average. We now stand at 300 million Euros while our goal in the strategic plan is to go up to 600 million in the next four years.

We want to diversify our portfolio. We have a strong presence in the food and agriculture sector where we are clear leaders, due to our experience, our seniority and our involvement in the entire process, from financing in order to buy seeds to factoring, renting and leasing, from mortgages and the purchase of a tractor to drought insurance.

We handle everything all the way to the exportation of the packaged product.
We also are involved in the real estate sector, but we must reorganise it, and it is in our strategic business plan to get involved in other areas of the same sector such as entertainment and tourism.

Tomorrow we are holding our monthly administrative council meeting in Valencia, in order to approve our growth and development project. We like to rotate the meeting places because it is important for our council members, a majority of whom are from Castile, Leon or Extremadura, to see that our savings bank is not only Salamanca, Soria and Cáceres, but that it has another dimension. Last month we met in Malaga and next month we will do so in El Algarve, in Portugal.

I believe that the new International Accounting Norms will affect the future of savings banks' shares. In our case, however, these concerns are minimal because our policy has been the most conservative, in the best sense of the word. We do have to reorganise our investments which is a question of our company's philosophy. Our industrial portfolio must mean improvement in our bottom line but we must determine to what extent. There are some savings banks whose yearly figures do not come from banking itself but rather their business shares. We are exactly the opposite. The importance of our stock portfolio in our yearly accounts is low and we want to increase it, so that it acts as a bond. Will it be profitable over a certain period? If not, we are not interested. We must be careful over all with medium and long-term commitments.

Let's talk about Caja Duero's national expansion. We have already seen an important increase in profits during the first trimester of 2005. Caja Duero is now the number four savings bank in Spain, in terms of national presence. You are going to open 100 new offices next year. With this aggressive expansion policy, where do you hope to see Caja Duero in the next two years?

Firstly, let me clarify one thing. In small provinces people generally ask why a small bus company which serves the province must begin to increase its destinations to include Valencia or Barcelona. I believe that every system should aim to grow. This was our obligation. Four years ago we purchased Spain's entire Crédit Lyonnaise network. It was a strategic opportunity which brought about certain consequences, such as what to do with branches spread all over the country. This made us the fourth savings bank in terms of domestic presence but this presence is highly concentrated: 100 branches in Caceres, 10 in Badajoz, 12 in Andalusia and 5 in Valencia. Thus, the strategy is conditioned by the branches' presence in financially developing locations. Our expansion plan is to follow through with the strategy.

Our growth is not only reasonable, it is the only alternative. Additionally, our results have been very good. Our efficiency ratio is not as good as it could be, but our growth is giving very positive results. We are maintaining the fidelity of our current liabilities in all our long-time locations while at the same time our assets are growing. Consumer growth in Spain, as well as in Portugal where we also have branches, continues at an incredible rate.

We are now undergoing a very aggressive decentralization process as the tools previously used in Caja Duero were those of a much smaller savings bank.

In comparison to private banks a worrisome characteristic of savings bank culture is that we are not at all proactive. This is something we are focusing on changing: learning how to seek out the business of small and medium-sized companies. We are creating business centres more than offices in the traditional sense of the word, above all in new areas where there are opportunities in niche markets.

Caja Duero is a member of the European Group of Financial Institutions (EGFI). Last May 10th you said that the keys for new finance tools must go through the internationalisation of markets. Do you consider that Caja Duero's offer has become more international or European due to its membership in EGFI?

What I referred to in Rascafría was not so much the internationalisation of markets, which has already taken place, but rather the internationalisation of savings banks management. Due to our presence in Portugal, we see that we have an opportunity. We have a client here in Spain who does business in Portugal and we can offer him the same service in both places. However, we have to export the service as well to our clients who are setting up business in Eastern Europe. This is a specialisation private banks dominate much more than most savings banks. We must learn, the same as we have done to break stereotypes such as private banks are fast while savings banks are slow, savings banks do not charge commissions while private banks do, etc.

There is another organisation "Grupo Viálogos", which is a network of 13 mid-sized savings banks under the leadership of Caja Navarra, which seeks out business opportunities and synergies that go further than each individual Autonomous Community. The group includes Caja Duero in Castile-Leon, there is a Galician savings bank, two in Andalusia, and so forth. It is evenly spread throughout the country in order to act when a single savings bank alone cannot. Regionally we have a similar model in Castile-Leon called Madrigal which is a risk capital organisation. Viálogos, however, through Juan Quintás support has a component which aids in exportation and internationalisation using CECA's experience. Due to savings banks being more closely tied to their region this is an aspect which is not yet very developed and is a pending matter.

Caja de Ahorros del Mediterráneo has opened a branch in London. What plans does Caja Duero have to go abroad, for example, to England, our major investment partner?

Our strategic business plan includes the development of the Portuguese market at this time, going from 6 to 24 offices spread across the country in the next two years. This is not a gamble, it is a necessity because we must give service to and do business with many clients who work there. In the United Kingdom we have a fair amount of activity, over all in assets, mortgage credits on second homes, in the entire real estate sector, on-line via internet, as well as through agents, but our strategic plan does not include opening an office there. It does, however, include seeking channels via agents in order to offer concrete products. In Portugal, consumer credit is going very well because our interest rates in general are lower than those of the Portuguese banks, which is the case in England with mortgages.

To what extent can a savings bank be an English investor's strategic partner here in Spain? Why is a savings bank preferable to a private bank or a risk capital fund?

I believe that they are all complementary. Exclusivity should not be considered. The truth is that Savings banks do take part, and we already have a working relationship with certain risk capital funds through shares. We actively participate in EBM, an investment bank, where the major players at times are savings banks. It is a wide open market. But in the world of small and medium-sized businesses where there is constant movement from Spain abroad and vice versa, we work together with business people from other countries. Even though savings banks have their own system, we offer investors the same official guarantees. We have the same efficiency rates, the same knowledge, but perhaps English business people do not realise that. When talking about a bank, everybody knows what it is, but when referring to savings banks there is not the same immediate understanding.

We do see a certain advantage in Caja Duero's advertising campaign, which has received an award this year over competitors such as La Caixa or SCH. It is called "the river of life" and poses a question to the viewer. What do you feel personally when you cross a river in your life?

I wish there were more than 24 hours in a day. Before choosing the appropriate treatment, the diagnosis must be clear. We needed an expansion plan but we wanted to know our current, past, and future customers' opinion of us. A contrasted efficiency/solvency study was carried out from which we learned that in our traditional region, we were much more than just a savings bank; we were an age-old guiding light. However, in other regions we were completely unknown. We learned as well that we did not reach young people, and we wanted to know why and how to get their business.

Since we are expanding, the first step is to make ourselves known. We are now paying 25% more in advertising but to a good end. We achieved an attractive campaign. We all sell the same products, we buy and sell money, and so it is difficult to set ourselves apart. People consume products but buy trademarks, so we had to transmit a message that hit home. We mix seniority and modernity, and we have broken the stereotypes that savings banks are neither flexible nor efficient, and so have reached a younger market. Our campaign was awarded because it succeeded in transmitting the message, and because our product is a good one. We have opened some internet banking products that have been successful thanks to this campaign. Moreover, this campaign has been very positive internally. There is a better sense of unity, of working in a common project for all the workers who have come together from several different banking entities.

Italy is well known for design, Germany for quality, the Asian countries for their low cost. From your point of view, what concepts should the brand "Spain" transmit?

Modernity joined to tradition, the long-established European culture in a country with other age-old traditions, something which the new world does not offer. I think the world sees us as a country where the past and the future are side by side. We also offer great diversity existing in harmony, which is something Spain and the rest of Europe have in common.

The brand "Spain" should transmit great energy coming from a solid base. Spain is an old country filled with young, modern people that pull it forward. Our growth, above the European average, is closely tied to the real estate sector. When this is no longer true we will have to look for a replacement, perhaps public works.

I would like to point out one last thing: I completely agree with Mr. Quintás, that savings banks' social activities are the precursor of Corporate Social Responsibility. It seems that now the European banking system and the business world have discovered the importance of this kind of activity, and did not even include savings banks when this idea first came up two years ago.

But now savings banks are considered to be an example.

This is a reaction to our tremendous success. Now savings banks are taken into consideration, CECA is consulted and savings banks are included in talks. A very stimulating norms project is being worked on. We are age-old precursors in this area of social responsibility. Caja Salamanca, our mother company, will celebrate its 125th anniversary on January 1st, 125 years of social activity.

What is Caja Duero's budget for socially responsible activity this year?

It's Very high. We are obliged by law to set at least 50% aside. People do not know that, but when considering what this has to do with Corporate Social Responsibility it is quite important. Socially responsible activity is not compulsory but it is part of our tradition and identity. The law only stipulates that we must reserve 50% of our profits, we could choose to reserve 100% and then there would be no socially responsible activity at all.

How does Caja Duero choose what sort of social activity, how much to invest and how?

The big debate in Spain now concerning savings banks is whether we should do more social works or cultural. We have, for instance, "The Ages of Man", the patronage of the entire Romanic exhibit in several Autonomous Communities, as well as other high quality cultural events which have given us great prestige. Nonetheless, our customers have made it clear that they prefer us to focus on social activities. Through the savings bank federation we are working more in this line. We are investing a lot of money in the restoration of Castile and Leon's cultural heritage. We are financing stem cell research. We have nearly reached 0.7% cooperation in developing countries. We have built a city called "New Salamanca" in El Salvador, in an area that had been destroyed by earthquakes. We have three old-age homes. We are supporting athletic activities. We have two homes for children with problems. Many small village councils count on us to finance a variety of projects. All this takes a large part of our budget and requires continuity.

In the future, Caja Duero plans to provide aid for entrepreneurs, or training projects to avoid unemployment. That is the direction we would like to take, but we must move slowly.