The Global Banking Leaders of the Future

Via HBR Online, a look at some of the emerging market banks that may replace outbound international institutions, such as Russia’s Sberbank and Brazil’s BTG Pactual which has been clear about its intent to become the largest investment bank in emerging markets by the end of the decade:

The global banking industry faces two opposing truths. On one hand, regardless of current economic concerns, emerging markets are where long-term growth opportunities lie. On the other, the crisis in the euro zone has forced banks to rethink their investments in numerous markets, if not retreat from them altogether. The result is a chasm of opportunity — a vacuum ready to be filled by banks from both the emerging and developed worlds.

Largely free of the debt and de-leveraging that have undermined growth in the West, emerging economies in Asia, Africa, and Latin America remain among the few areas experiencing relatively good growth. Even amidst the euro crisis, the World Bank (PDF) expects developing economies to grow at a rate nearly four times that of the developed world over the next year.

While European banks were among the first to move into emerging markets, the euro zone crisis has led many to recoil or switch course. Recent headlines have been foreboding, highlighting concerns that the retrenchment could leave the most promising engines of global economic growth sputtering. Indeed, Bank for International Settlements (BIS) figures for the last quarter of 2011 showed that cross-border lending to emerging economies had declined by $75 billion — its steepest fall since the Lehman collapse.

And yet three months later the same report showed a reversal: cross-border lending to emerging economies in the first quarter of 2012 increased by $86 billion. Lending from Europe remained flat, and the gap was filled from elsewhere — largely Asian offshore centers and the U.K.

Filling the Gap

A combination of healthy Western banks and the players operating in and around emerging markets are targeting opportunity beyond the euro zone crisis. Their movements could potentially create a new class of global banking leaders for the next decade. Which are the likeliest to seize the opportunity?

Japanese banks.
In some respects, the retrenchment by European banks bears similarities to the plight of Japanese institutions in the 1990s, when the contraction of the nation’s domestic economy undercut its international banking giants. As the Japanese retreated home, European and other Western banks moved onto the global stage. Now the situation has reversed. Several of Japan’s major banks, which have a surplus of deposits, are again expanding internationally and buying up loan portfolios from Western banks. Key players include Sumitomo Mitsui (PDF), Mitsubishi UFJ, and Mizuho.

Emerging market players. The banking vacuum might be filled from within, as the European retreat provides unprecedented opportunity for emerging market banks looking to form regional hubs and replace outbound international institutions. Take Russia’s Sberbank: Last year it agreed to buy the operations of Austria’s Volksbank in eight Eastern European countries for about $800 million. Likewise, BTG Pactual in Brazil has been clear about its intent to become the largest investment bank in emerging markets by the end of the decade. It recently bought Bolsa y Renta (PDF), a Columbian securities firm, and paid $600 million for Celfin Capital, a Chilean firm. In the East, Chinese banks and players like Singapore’s DBS Bank and Malaysia’s CIMB Bank are opening overseas branches and making more and more regional acquisitions.

Forward-looking Western banks. A handful of mature Western institutions are reinventing themselves as global players. Aside from the well-known players that have long profited from emerging markets (BBVA, HSBC, Santander, Standard Chartered), new names are emerging. For example, Wells Fargo plans to expand into 20 new markets, including China, Hong Kong, India, South Korea, and Singapore. JP Morgan has reported plans to assert itself throughout Asia, Latin America, and Africa to capture $1 billion in annual pre-tax profit over five years. Barclays has bold plans for investment and expansion in Africa (PDF).

These banks face a common challenge, too: Customers in emerging markets have proven especially fickle. Accenture research shows that bank customers in these economies are twice as likely as those in mature markets to switch to another bank for new products.

The winners of this global challenge must minimize churn and excel at customer retention. To do so, they will need to acquire genuine local-market knowledge and exhibit a disciplined approach to acquisitions. This might also be accomplished through joint ventures with trusted local brands. Ensuring customer support through cutting-edge systems and IT will be critical, as will the ability to tap online, mobile, social, and analytic innovations. Institutions that successfully fill the vacuum to capture future growth in emerging markets will join a new class of global banking leaders.

This entry was posted on Wednesday, October 24th, 2012 at 4:47 pm and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.