Developed market banks tend not to favour retail as a way to move into emerging markets. But, as several have found, catering for smaller businesses and individuals is a good way to establish a foothold before expanding into Asia’s developing regions. Peter Janssen reports.
As a frontier emerging market, Cambodia is not an immediate draw for overseas investors. National Bank of Canada (NBC) chief executive Louis Vachon says that when it invested in Cambodia’s Advanced Bank Asia (ABA), it was a hard sell to shareholders. “Were my shareholders sceptical initially? Yes,” he says.
NBC’s Cambodia investment is just one example of several pioneering deals done by overseas banks in the retail markets of Thailand and the CLMV region comprising Cambodia, Laos, Myanmar and Vietnam. More usually when Western and Japanese banks invest in emerging markets they focus on their compatriot companies there, then branch out to cover larger domestic companies.
But NBC, along with France’s BRED Banque Populaire and Japan’s Bank of Tokyo-Mitsubishi UFG (BTMU), is showing that a more innovative strategy focusing on the trickier retail and small and medium-sized enterprise (SME) markets can be made to work.
Cambodia draw for RBC
Looking to invest in an emerging market, in 2014 NBC took a 10% equity share in ABA, one of Cambodia’s fastest growing banks, which now ranks fifth in terms of assets. The initial investment amounted to C$250m ($188m), or about 1.5% of NBC’s total market capitalisation at the time.
As ABA grew, NBC gradually upped its equity stake to 30%, then 42%, until finally in late 2016 it took 90% of the Cambodian bank (which had been a one-branch operation in 2007 when Kazakhstan investment bank Visor Capital bought it from its original South Korean founders).
The acquisition has been eased by ABA’s impressive performance of the past three years. In 2016, its loan portfolio grew 63% year on year to hit $789m, deposits were up 30.6% at $856m and net profit was $28m, up 76%.
“Two things moved the deal forward,” said Mr Vachon. “One is the good performance of the bank from both the financial and the operational standpoint. More importantly, we had an investor day in Toronto last September and the Canadian investors got to meet the management of ABA, and I think they saw right away that there was a clear game plan and a clear vision.”
ABA’s management team is led by CEO Askhat Azhikhanov, who came to Cambodia having worked at the National Bank of Kazakhstan and Credit Suisse in France. ABA has pursued a strategy of banking the 'real economy', which in Cambodia means lending primarily to SMEs. The bank’s strong digital platform, in a country where 75% of the population is under 35 years old and exceptionally e-literate, has attracted a strong retail depositor base.
“ABA is a good example of a great bank with a great strategy,” says John McGinley, managing partner of Mekong Strategic Partners, a Cambodia-based financial consultancy. “It looked around and rather than compete with the foreign banks at the top tier of the economic pyramid, it decided to go down and bank the SME sector. NBC came in as investors once the ABA strategy was up and running.”
That said, NBC, which calls itself a super regional bank in Canada, has no plans to become a global bank. “What we are looking to do, in one, two or three areas around the world, depending on their success and momentum, is to replicate the super regional model that has served us so well in Canada,” says Mr Vachon. “That’s all we’re looking to do, so that’s why we have looked at emerging economies.”
BRED's Laos inroads
NBC was introduced to ABA by Yves Jacquot, a former executive at France’s BRED Banque Populaire, the largest of some 30 co-operative banks that comprise the BPCE Group, France’s third largest bank by Tier 1 capital. No stranger to emerging markets, when it was seeking growth in the 1990s BRED began setting up operations in French territories such as New Caledonia in the Pacific, and Martinique and Guadeloupe in the Caribbean.
After those ventures proved successful, the bank looked to places such as Vanuatu and Fiji, until in 2010 it bought a 54% stake in Banque Franco Lao (BFL), a joint venture with BCEL, the largest commercial bank in Laos. Even though Laos is a former colony of France, few French multi-nationals operate in the small, land-locked country. But when BRED invested in BFL, it was not considering the corporate banking market.
“We try to grow with the local economy. In Laos, probably 90% of our customers are locals,” says Guillaume Perdon, BRED’s regional head for south-east Asia, who set up the Lao banking operation. “For us it is mainly SMEs. Retail also, but the most successful sector is the SME sector, where we can provide a competitive approach,” he adds. Mr Perdon is based in Cambodian capital Phnom Penh, where BRED opened a 100%-owned banking operation in March.
In Laos, a mountainous and impoverished country where more than 25% of the 6.8 million population has no access to financial services, BFL has set up 22 branches with one in each province – an unusual reach for a Lao bank. The joint venture showed a profit in two years, Mr Perdon says. In 2016 BFL reported a net profit of K10bn ($1.2m), doubling its 2015 profit of $581,182. “At BFL, we plan to double the profits in 2017 compared with 2016,” adds Mr Perdon.
BRED executives highlight the benefits of being a co-operative, with Mr Perdon saying: “Compared with a publicly listed [company], as a co-operative we take a really long-term view. But it’s not a development project. We have to be profitable.” BRED hopes its Cambodia operation will be profitable within five years.
Japan’s exception
Japanese corporations are better known for their long-term views when compared with their Western counterparts, but even so, not many Japanese banks have taken the plunge into retail banking abroad, let alone in frontier markets. The normal strategy for Japanese banks abroad has been to follow their corporate customers, and once established overseas perhaps branch out into corporate banking for non-Japanese clients.
An exception to the norm is BTMU, which in 2013 bought Bank of Ayudhaya, Thailand’s third largest bank by Tier 1. The move was aimed at capturing Thailand’s retail banking market and developing a platform for pioneering the CLMV region.
“Regardless of whether it’s an emerging economy or not, if you want to capture the growth of a country, you have to go into retail banking,” says Noriaki Goto, the Japanese CEO of Bank of Ayudhaya.
“There are a couple of ways to go in and capture those retail customers,” he adds. These include setting up a joint venture with an existing local bank (where the local partner holds the majority of shares), or taking a majority share in an existing local bank and starting from scratch with a new bank. “But building on your own, and focusing on limited products to tap the retail market, you have limited growth opportunities. So to maximise, to capture your growth opportunities, of course [having] a fully fledged bank will give you the biggest opportunity,” says Mr Goto.
Springboard to Myanmar
Last year, Bank of Ayudhaya bought a majority stake in Hattha Kaksekar, Cambodia’s fourth largest microfinance company. The Cambodian banking system was essentially built from scratch in the early 1990s from microfinance operations that have grown in size and sophistication with the economy to serve Cambodia’s emerging middle class. Acleda Bank, the country’s largest commercial bank, began life as a microfinance operator.
Bank of Ayudhaya’s purchase of Hattha Kaksekar, may prove not only a strong entry into the Cambodian market, but also to Myanmar, another emerging market that is ripe for microfinance. “By going in with Hattha Kaksekar, and enhancing its platform, it is going to be a huge [learning] experience for us when we go to Myanmar,” says Mr Goto. “We’re learning a lot from this, so when we want to do something similar in Myanmar, we have the experience.”
Mekong Strategic Partners brokered the Hattha Kaksekar buyout. Mr McGinley, who was ANZ Group’s chief CLMV region strategist before setting up his own consultancy, believes too many Western banks are losing out on emerging markets because of their low risk appetite for retail banking.
“I think if you are a bank and come in to these markets, you have an obligation to bank the economy,” he says. “That’s the right thing for these countries and the right thing for the banks’ shareholders – because that’s where the returns are, that’s where the yields are and that’s where the margins are.”
