Why Preserve Risky Loans? The Value of an Inherited Franchise

The Banco Popular–Santander case presents a commercial puzzle. After the resolution, Santander gave its strongest relative support to riskier inherited borrowers even though those firms were harder to assess and more exposed to a lender’s concern about default. The useful question is not whether Santander acted out of goodwill. It is why preserving selected relationships could protect the value of the business it had acquired, and whether the evidence fits that explanation better than market power, zombie lending, or regulatory signaling. The answer shows how a buyer can value continuity without committing to every loan.

A loan relationship is part of the acquired business

The accounting value of a loan is only one part of what a bank acquires. A lending relationship can generate future interest income, fees, deposits, referrals, and opportunities to serve a firm as its needs change. It can also provide information that makes future decisions less costly. A bank that already understands a borrower’s cash cycle and operating context may be better placed to distinguish a temporary setback from a fundamental failure than a bank meeting the firm for the first time.

The relationship can be lost in two ways. Santander might allow the borrower to leave for a competitor, or the borrower might fail after outside lenders withdraw and Santander does not maintain enough financing. In either case, the immediate loan balance is not the only value at risk. The buyer may lose future business, local presence, and the opportunity to build a wider customer relationship. A distressed borrower is not necessarily an economically worthless borrower. If the firm is viable but temporarily exposed, preserving the relationship can be a way to preserve the franchise acquired with the failed bank.

Banco Popular supplied Santander with an unusually large platform for that strategy. At the time of failure, Banco Popular was Spain’s sixth-largest bank and a leading lender to small and medium-sized enterprises, with a 13.8% share of the Spanish SME lending market. It provided loans to roughly one-fifth of Spanish non-financial corporations with bank borrowing, and around one-quarter of those firms relied solely on Banco Popular for financing. Santander’s SME loan-market share rose from 11.1% before the transaction to 24.8% afterward.

Those figures describe the potential scale of the franchise, not a guarantee that every customer was profitable or that Santander would keep every facility unchanged. They indicate why relationships mattered to the buyer’s strategy. Santander moved from third place in the Spanish loan market to the leading position, and its access to Banco Popular’s SME customers gave it room to deepen relationships. The paper reports that Santander’s fees-to-loans ratio was 1.06%, compared with 0.51% for Banco Popular. That difference is consistent with a more service-intensive model and with an opportunity to cross-sell services to inherited customers, although the ratio itself does not prove that any one borrower would generate future profit.

The value of an inherited relationship is also partly an option on future information.