Emerging markets take hold in the developing world

The competitive landscape of the global banking industry is shifting as the repercussions of the financial crisis take shape against a backdrop of a broader trend that is seeing the increasing dominance of emerging markets in the world economy. 

Where once international banking was about global banks ‘being all things to all men’, attempting to offer all products in all countries, now there is a trend emerging of a patchwork of regional banks across the globe, and the competition to the US and Europe-based global banks is coming from indigenous emerging market banks that are building franchises in their respective regions. 

Not only have these emerging regional players made acquisitions from the US and European banks that are selling off non-core assets in their regions, they have also grown through following their customers overseas as they expand along with the changing patterns in trade flows. 

ANZ's expansion

In Asia, regional franchises are emerging. For example, Australia’s ANZ has picked up some of the pieces from UK-based Royal Bank of Scotland’s retreat from Asia. In 2009, the Australian bank picked up the RBS acquisitions in the Philippines and Vietnam, and then in 2010 it acquired the retail wealth, private banking and commercial businesses in Indonesia, Singapore and Hong Kong. In 2010, ANZ also began operating in China and a year later it began banking operations in India.

Although it is an Australian bank, ANZ is carving itself a reputation as an Asian player and has been dubbed by its CEO Mike Smith as a “regional bank with strong Australian ties”. 

The markets of Singapore and Malaysia have also been a springboard for regional expansion. Singaporean banks DBS, OCBC and United Overseas Bank have been expanding throughout the Asia-Pacific region alongside Malaysia’s Maybank and CIMB. 

The project for economic integration of the Association of South East Asian Nations (Asean), which is expected to be completed in 2015, is providing opportunities for banks to operate seamlessly across national borders and build a regional franchise. 

CIMB's multi-local model

CIMB has also acquired assets left by the retreat of RBS. In 2012, it purchased a large chunk of the Asia-Pacific cash equities and associated investment banking business from RBS, and also agreed to buy a majority stake in the Philippines Bank of Commerce. Such acquisitions set the bank up to pursue its vision of being a leading indigenous Asian universal bank. 

“Our core strategy has been to evolve a ‘multi-local model’,” says Nazir Razak, CIMB Group’s managing director and CEO. “Our leaders in each market are predominantly locals who have a deep knowledge and understanding of the markets they operate in. At the same time, we have created a strong sense of ownership and alignment to the whole group’s agenda.”  

He adds that the biggest challenge with expanding the bank’s footprint is with balancing between established company practices and the unique needs of different markets. 

Maybank's local focus

Likewise, Maybank is also pursuing expansion in the Asean region and has embedded itself in local markets while competing with the domestic players. “Given the varying operating conditions in different markets, Maybank's approach has always been to grow responsibly and sustainably within Asean and also its trading partner nations. This is always complemented with a strategy of being prudent and using controlled aggression,” says Maybank’s president and CEO, Abdul Wahid Omar.

“Our international network enables us to expand our services to clients in different markets as well as diversify our income streams and tap into high-growth markets. This helps us to add value to our stakeholders. However, we differentiate ourselves by ensuring we grow in line with our corporate mission of humanising financial services,” he adds. “We want to be bankers with a heart.”  

On what makes Maybank stand out, Mr Omar says: “Another differentiator is our ability to tap on group synergies to build our regional network. Maybank already has a wide network within Asean as well as a presence in our main trading partner nations. With our intention of growing our presence in Greater China, the Middle East and, eventually, India, we are positioning ourselves as the banking group to support cross-border transactions and investments between Asean and China, Asean and the Middle East and Asean and India.”   

The challenges of such an expansion strategy, he explains, include the availability of skilled resources that can be deployed across the region. Another challenge is the amount of capital required to enter a market and whether the returns will be commensurate with the investment. Regulatory requirements and constraints of the various markets are also a challenge as certain markets limit the type of products and services that can be offered. Also, says Mr Omar, the ability to scale operations effectively and integrate the new infrastructure within the group is a challenge. 

DBS thinking only of Asia

Another regional bank that is expanding across Asia is Singapore-based DBS. “Unlike the global banks, we are focused on growing within Asia, where we believe we have a competitive advantage. Outside of Asia, we use our non-Asian locations to serve as network points to assist Asian-centric business,” says Piyush Gupta, CEO of DBS Group. The bank has focused its growth on Greater China, south-east Asia and south Asia. “This is unlike our regional competitors who tend to focus on one sub-region,” adds Mr Gupta. 

Like other regional banks, DBS faces the challenges of regulatory requirements in each of the markets where it chooses to operate. “In markets such as China and India, there are limitations on the pace at which foreign banks can establish branches. For example, in China, the pace of our branch expansion is largely dependent upon the pace at which all the requisite regulatory approvals can obtained. In India, the maximum number of branches allowed under the Comprehensive Economic Cooperation Agreement between India and Singapore is 16,” says Mr Gupta.

“While we have a universal banking franchise in Singapore, in most of our other markets, where our network is more limited, we are focused first and foremost on institutional banking and the affluent segment.”

The prospects for the Asean region are looking brighter with the opening up of Myanmar, and many regional banks are looking to establish operations in the country. For banks such as Standard Chartered, the opening up of Myanmar would connect its franchise in south-east Asia. And as an international bank that focuses on emerging markets in Asia, Middle East and Africa, the bank is well positioned to capture the growth in the emerging markets. With networks across these regions, Standard Chartered is able to capture both sides of the banking business to support the increasing trade flows between emerging market economies. 

Ecobank's wide reach

Africa has also witnessed a growth in indigenous banks expanding across the continent. For example, Morocco’s Attijariwafa has become Africa’s biggest lender by assets outside of South Africa, and Nigeria’s United Bank for Africa operates in 19 African countries. Togo-based Ecobank is also building a regional franchise and has operations in 32 countries, making it Africa’s biggest lender in terms of geographical reach. The bank is ambitious and seeks to grow along with Africa’s economic growth. 

“We approach the task of building our footprint based on our fundamental understanding and on-the-ground knowledge of local trade flows between the many African countries in which we operate,” says Thierry Tanoh, Ecobank’s group CEO.

“While many of our competitors focus solely on having a presence in the key African capital cities, we position ourselves not just in major conurbations but also in border towns and smaller cities, where trade caravans and large informal markets have developed over many years of intra-African trade. We are building commercial bridges to enable greater trade and capital mobility within the African landscape.” 

“In Africa, where you have more than 50 countries and four official business languages, there cannot be a one-size-fits-all approach to market entry. We tailor our product offerings to suit the varying needs of our customers, for example, dual-language ATMs and recruiting from the local business community to fill customer-facing roles. We feel that this approach offers us the best opportunity to quickly capture market share.

"However, Africa’s recognised deficit in strategic infrastructure remains one of our biggest challenges in growing our network. As a result, we have focused on investing in our own robust IT and telecoms platform, which is now the largest corporate network in middle Africa.”

Standard Bank advances 

While Ecobank has a geographical reach across the continent, South Africa’s Standard Bank is the largest African bank by assets and earnings. “Standard Bank Group’s expansion into sub-Saharan Africa differs from many of our local peers in that we are at an advanced stage of building on-the-ground banking franchises. We have a number of mature banking franchises in sub-Saharan Africa, where we have strong markets shares across the full spectrum of personal, small business, corporate and investment banking,” says Jacko Maree, Standard Bank Group’s chief executive.

“We can therefore offer our clients a unique proposition of being their local bank in country, their sub-Saharan African bank for clients operating across the region, as well as their international bank for cross-border trade and investment business.

“The biggest challenge when entering a new market is that building a full-service domestic bank from scratch takes a long time and is very expensive. It is usually preferable to acquire an existing bank than build one. However, there are currently very few quality acquisition opportunities to consider that are reasonably priced, given the intensely competitive environment. We have built a bank from scratch before and been successful, and we are currently doing it in Angola – but it is tough.”

China's influence

Such African banks are not just taking advantage of the economic growth on the continent, but also increasing trade flows with other emerging markets. China’s rise to global economic dominance has seen it form trading relationships with emerging markets across the world. While many observers have commented on the economic shift from West to East, there has also been an emerging trend of increasing ‘South-South’ trade flows between emerging markets.

According to HSBC’s Global Connections trade report, world trade growth is forecast to rise to approximately 5% in 2013 and pick up to about 6% to 7% between 2014 and 2016. Trade flows, the report notes, will be driven by the emerging markets, led by Asia and driven by the influence of China and India. 

China’s banks are following these trade patterns and establishing an international footprint. For example, the state-owned Chinese bank, ICBC, bought a 20% stake in Standard Bank in 2007. Since then, ICBC has expanded in other key emerging markets. 

For example, in December 2012, ICBC gained a banking licence for a branch in Brazil, which was set up to facilitate bilateral trades and investments between China and Brazil. According to ICBC, the trade value of imports and exports between China and Brazil is expected to have totalled $95bn in 2012. According to China customs, the growth in China-Brazil trade volumes since 2009 has been 40%. The addition of this Brazil branch means that ICBC now has a global network of nearly 400 overseas branches with full banking licences. 

“Besides providing services to ICBC’s existing clients, ICBC Brazil will pursue a more positive local presence. ICBC Brazil’s vision is to facilitate Sino-Brazil economic and trade relations,” says Zhao Guicai, head of ICBC's Brazil business. “There are a lot of big differences in many aspects between Brazil and China. To many foreign-invested companies in Brazil, one of the biggest challenges in running their business is the high cost in Brazil.”  

Aside from the expansion of Chinese banks such as ICBC in Latin America, the region has also seen the growth of indigenous regional banks. Local lenders are becoming more ambitious in their expansion and have also been able to take advantage of the retreat of European banks from the region. For example, Spain-based Santander Group sold its operations in Colombia to Chile’s CorpBanca, and HSBC sold its central American assets in Costa Rica, El Salvador and Honduras to Colombia’s Banco Davivienda. 

Brazil's Itaú Unibanco has been on a path to regional expansion since it was created by the merger of Banco Itaú and Uniao de Bancos Brasileiros in 2008. And BTG Pactual, an investment bank which coordinated approximately 50% of the total initial public offerings in Brazil between 2004 and 2011, is set to expand further into the region. In February 2012, it announced its merger with Chilean asset manager Celfin, which has the potential to create a leading investment banking group in the region. 

As emerging markets account for an increasing portion of global economic growth, it remains to be seen which of these regional players will develop into becoming the big global players of the future.