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Executive Summary 4
Charting A Course 28
Concluding Thoughts 34
Executive Summary
You could be forgiven for thinking that the There are also many banks, even within
story of international banking over the last Europe and the US, who - although wounded
five years has simply been one of retreat, by the financial crisis - now find themselves
retrenchment and penance. The challenges on more solid ground and are facing the
posed by the aftermath of the global financial challenge of where earnings growth will
crisis have certainly caused many banks come from over the next decade. From large
to pull back and limit their international multi-local institutions looking to optimize
ambitions. Some have needed to shore up their international footprint, through global
their capital positions; others have disposed of product specialists, to smaller domestic
international assets as a condition of state aid; players looking to benefit from their clients’
while others have retreated from international overseas expansion, our observation is that
businesses simply because they see a rising international strategy is now back on the
regulatory burden, increasing complexity, and agenda in many bank boardrooms.
unattractive operating economics. Whatever
Compared to the last major expansion in
the motivation, the result has been a clear
international banking a decade ago, the
trend towards the re-localization of banking
players today face a changed landscape
and many management teams who have and are caught between two macro trends
been focused on returning core domestic pulling in opposite directions. On one
franchises to profitability. hand, many of what were once emerging
markets in the Middle East, Latin America
Although this headline story is undoubtedly
and Asia have now matured into material
true, it also conceals a more nuanced and
profit pools with medium-term growth
interesting sub-text in which a more positive rates that far outstrip those anticipated
view of international expansion is evident. in Europe and North America. But on the
While many of the pre-crisis global banking other hand, enthusiasm about market
powerhouses have been putting their houses fundamentals now needs to be tempered
in order, there has been a group of large by a regulatory environment that is driving
financial institutions (mostly outside the US increased localization, higher operating
and Western Europe) that have actually done costs and prohibitive barriers to entry in
very well over the last three to four years many of the most attractive markets. So
and are now acting from positions of relative just as international expansion becomes
strength. They recognize that this position more attractive on a pure economic basis,
of relative strength may not last, so they are the degree of difficulty and inherent risk in
now starting to re-evaluate and rethink their executing such a strategy is beginning to
international strategies. look prohibitive to many bank Boards.
A key driver of the Age of Discovery was the 15th Century version of a
regulatory intervention. The demise of the Byzantine Empire culminating
in the fall of Constantinople to the Ottomans in 1453 denied Western
Europeans easy access to the lucrative overland trade routes to Asia,
and the Silk Road which Marco Polo had travelled in the 13th century
was effectively closed to them. Faced with stagnant domestic markets,
yet fully aware of the promise of riches to the East, Europeans embarked
on explorations by sea in the hope of establishing new trade routes for
spices and precious metals.
“Over the Mountains of the Moon, down the Valleys of the Shadow, ride,
boldly ride…if you seek for El Dorado.”
Edgar Allan Poe, “Eldorado”, The Works of the Late Edgar Allan Poe (1850)
7
Given the trauma of the global financial crisis, In the United States, the Dodd-Frank act
the ongoing uncertainty around the future represents a far-reaching policy shift in regulation,
of the Euro, and sundry other challenges with the Tarullo FBO1 rule, in particular, having
from mortgage foreclosures to money major implications for large foreign banks
laundering, it is hardly surprising that most operating in the US. Meanwhile in the UK,
global financial institutions have spent the the Independent Commission on Banking
last five years looking inward. The result has (Vickers) report proposed the ring-fencing of
been the forced or voluntary disposal of many retail activities and a definitive move away from
foreign assets, the increased localization the Universal Banking model. While unlikely to
of many large banks, and a general be implemented in its original form, the Liikanen
retrenchment of the global banking industry. Report also suggests that similar ring-fencing
In some cases, the principal driver has been could be in the cards for the rest of the EU.
regulatory pressure around capital adequacy
and liquidity. But in many other cases These market and regulatory forces have
retrenchment has simply been a response to created an environment that has been
low returns and the conclusion that marginal increasingly inhospitable to internationally
businesses in poorly understood emerging active banks. The result, as shown in Exhibit 1,
markets are a management distraction and a has been a five year period during which bank
source of disproportionate operational risk. 1 Foreign Banking Organizations
14
1
12
2 3 4 5
10
2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013e
1 • Citi divests several businesses in Japan for $7.8 BN 4 • HSBC exits 8 Latin American countries and scales back/exits in
• HSBC sells French mutual fund operations 6 Eastern European markets
• SocGen sells asset management subsidiary in London (AUM $8.2 BN) • SocGen sells stake in US and Canadian investment/wealth
management firms and Greek, Egyptian and
2 • Citi sells part of consumer loan portfolio in Europe and Canadian Indian subsidiaries
MasterCard business, a $2.1 BN credit-card portfolio • RBS scales back capital markets activity in 4 Asian countries and
• WestLB sells French private bank sells private banking business in Latin America and Africa
(total AUM $2 BN+)
• SEB sells German retail banking business for €555 MM
• Dexia sells DenizBank in Turkey for $3.5 BN
• BNP Paribas sells Cayman and Panama WM
• ING sells ING Bank of Canada (ING Direct) for $3.1 BN
3 • Citi sells Egg UK credit card business (£1.8 BN gross assets) and
divests Citibank Belgium 5 • Citi announces scale back of operations in 21 countries
• HSBC sells US card business to Capital One for $2.6 BN and 195 • HSBC sells US personal unsecured and homeowner loan portfolios
branches in NY for $1BN for $3.2 BN
• RBS sells £1.8 BN Spanish real-estate portfolio • RBS may sell Citizens in US and is scaling back operations in India
• Dexia sells Luxembourg subsidiary for €730 MM
• ING sells ING Direct USA for $9 BN to Capital One
20
15
Post-crisis ROE
10
Change in ROE
(pre to post crisis)
Pre-crisis ROE
5
Global average
(post-crisis)
Global average
0 (pre-crisis)
Indonesia
China
Brazil
Canada
Turkey
Russia
India
Mexico
Australia
Europe
USA
9
Looking forward in Exhibit 3, the relative protectionism on both the retail and wholesale
valuations of major banks also show this sides of the business. Regulations such as
bifurcation between an industry in the US and Vickers in the UK and Dodd-Frank in the US
Western Europe still struggling to come to will result in more ‘domestic’ capital markets
terms with the post-crisis world, and markets businesses, limiting cross-border and
where there is more confidence in the ability international activity. As recent significant
of financial institutions to deliver attractive fines for money-laundering indicate, there is
future returns to shareholders. also a high cost associated with arms-length
international banking relationships. Merely
This performance gap and the procession dipping a toe in international banking waters
of asset disposals by the US and Western has become an increasingly dangerous activity.
European players most badly-hit by the crisis
has already created some unique opportunities So many of the most successful global banks
for banks with international ambitions. of the last five years now face a quandary.
Santander has made a number of acquisitions, They are often operating in either low-growth
including Sovereign Bank and the auto loan and or highly concentrated domestic markets
portfolios of Citi and HSBC in the US, SEB’s retail and the medium-term economic returns
banking business in Germany and two banks from these markets are unlikely to satisfy their
in Poland. Canadian banks have also been shareholders. Because of their past success,
acquirers, as evidenced by TD’s US acquisitions they now have the financial strength to enable
of Commerce Bank and Chrysler Financial Corp, them to look internationally for opportunities.
Bank of Montreal’s US acquisition of Marshall Yet the regulatory tide is clearly moving
& Ilsley, and Scotiabank’s serial acquisitions against them, making it harder to pick off
in Latin America, the Caribbean and Asia. niche international opportunities and take a
Other recent and notable international low-risk approach to foreign expansion. The
expansions include Sberbank’s foray into result is a renewed interest in international
eight CEE countries, Banco Itau’s nascent portfolio strategy to both boost and
growth efforts in Peru, Colombia and Chile, diversify earnings.
CIMB’s acquisition of most of RBS’s investment
banking operations in Asia, and Mitsubishi Broadly speaking, the banks we work with are
UFJ’s expansion in the US with the acquisition considering two approaches to international
of Pacific Capital Bancorp and the addition of expansion. The first is essentially flag planting.
several project finance books. Recent asset In this approach, foreign banks satisfy
sales in attractive markets like Turkey have alsoregulatory demands for localization by building
drawn bids from multiple banks, for example, or acquiring full-service operations that look
Sberbank, Commercial Bank of Qatar, and and act like domestic institutions. The ‘glocals’
Burgan Bank have all made Turkish acquisitions. or multi-locals we have studied who follow
this approach hope to benefit from strong
However, it isn’t all good news for the winners. market fundamentals by being a ‘domestic’
Some of the factors that were the foundation institution in many different markets.
of their recent outperformance now present
a challenge for future growth. Many of the The second approach is a ‘trader’ or ‘enabler’
most successful post-crisis banks, such as the strategy. This model involves limited on-
Canadian, Australian and Brazilian market the-ground presence in foreign markets
leaders, are now facing economic, regulatory and instead develops the products and
or competitive constraints which limit their capabilities necessary to serve an increasingly
growth at home. At the same time, global international customer base. The target client
regulatory changes are signaling increasing base includes both domestic clients (consumer
2 Price-to-book
of top banks
1 66 percentile
price-to-book
33 percentile
0 price-to-book
Indonesia
China
Brazil
Canada
Turkey
Russia
India
Mexico
Australia
Europe
USA
Note: Price-to-book data for 2012. Percentile price-to-book lines indicate that one third of top 10 banks in the target countries
shown had price-to-book ratios higher or lower than the 66 percentile or 33 percentile price-to-book ratio respectively
Source: Thomson Reuters Datastream, Capital IQ, company reports, Oliver Wyman analysis
11
2
The Explorer’s Map
While some explorers like Magellan and Columbus just headed off on
a compass bearing with the hope of reaching their destination, most
explorers benefit from a good map to guide their journey. The map provides
an objective description of the current state of the world: Where are the
largest treasures? How difficult is it to get there? Once you get there, how
do you access the bounty? Are the locals going to be friendly or hostile?
What strategies and technical capabilities will you need to succeed?
13
Exhibit 4 shows the factors we have used This type of analysis provides a consistent
to construct indices of economic and view of global banking opportunities from
structural attractiveness for the major the perspective of an outsider looking in;
global banking markets. recognizing that domestic players may have
a very different perspective, particularly on
For institutions taking a multi-domestic the structural dimension.
approach (i.e. banks who aspire to play on-
the-ground in multiple markets), economic Sub-segments within these markets, such
and structural analysis can help you build as wholesale or high-net-worth, require
a comprehensive market map as shown in another deeper level of analysis. But at the
Exhibit 5. macro-level, this type of map begins to
segment the market opportunities. Some
conclusions are unsurprising. For example,
Economic index
Factor Description Key determinants
Market potential •• Market size of the banking sectors as •• 2011 revenues
measured by banking revenue pools in •• Expected 10 year CAGR
each market
•• Future growth of the banking sector in
each market based on the underlying
economy, market demographics,
expected wealth creation, state of the
banking sector and overall financial
market development
•• Provides a view of the size of the
opportunity in the short and long-term
Profitability •• Expected returns – these must be •• ROE
reviewed by segment as profitability •• Margin expansion/compression trends
varies considerably by product, segment
and model in most markets
•• Sustainability of returns over the mid-
to long-term
Structural index
Factor Description Key determinants
Market concentration •• Structure of the banking industry •• Top 5 bank/top 10 bank market shares
in terms of level of concentration or •• HHI index
fragmentation of the market
•• Competitive considerations affecting
new entrants ability to succeed
Regulation & openness •• Local regulatory environment may •• Quantitative scores based on financial
of market limit or encourage foreign entry sector regulation
and participation •• Foreign bank participation levels
•• Certainty or lack thereof of the regulatory
environment also affects attractiveness
of markets
Geo- •• Institutional frameworks and the rule •• Quantitative scores based on rule of law
political environment of law affect attractiveness from a and business regulation
structural perspective
•• Some markets, particularly those with
higher returns, may be plagued by higher
volatility which affects attractiveness
of markets
Colombia
Thailand
Turkey Malaysia Singapore
Korea Mexico
Brazil Canada
GCC Hong Kong
Italy
Note: GCC refers to the Gulf Cooperation Council and includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the
United Arab Emirates
many European markets are unattractive In the US, the green shoots of a real economic
as a result of poor economic fundamentals recovery are now becoming apparent and
and some are further hindered by the the sheer size of the market makes it worthy
lack of opportunities for entry by foreign of consideration on the economic dimension.
banks. Other markets where the economic However, the more interesting perspective
fundamentals are undoubtedly strong – is that despite its reputation as a litigious
such as India and China – continue to be market with complex and overlapping
difficult places for foreign banks to make regulatory agencies, the US is structurally
profits or build a meaningful franchise. But very attractive to foreign entrants. The
the good news is that there are markets key drivers of this attractiveness include
where economic and structural factors its market fragmentation, minimal
combine to create attractive opportunities restrictions on foreign ownership, history of
for foreign institutions. technological innovations and the plethora
of specialist business models, all of which
Some of these attractive markets, such create multiple entry options. Given the
as Mexico or Poland, fit well with current status of the US dollar as the world’s
conventional wisdom. reserve currency (and the dominant currency
for international trade) there are also unique
But others, such as the US and UK, may be benefits to USD funding that should also be
more counter-intuitive given recent history. taken into consideration.
15
We also think the UK is potentially attractive, although Disaggregating the
for different reasons. While the macroeconomic economic dimension
fundamentals are potentially as challenging as the rest of
Western Europe, the UK is unusual in being a market in In the 21st century, China is still an emerging economy, but
competitive transition. Having been a pre-crisis oligopoly, the situation was quite different in the 16th century when the
forced asset disposals, government encouragement of idea of the “middle kingdom” placed China at the heart of
new entrants (including the promise of lower capital pan-Asian trade routes. With a large population and a trading
requirements) and public antipathy towards established infrastructure that could handle everything from silks to spices
players have created a potential window of opportunity to precious metals to fine art, China enjoyed high growth rates
to reshape the traditional branch-based retail banking and had the necessary surplus wealth to manufacture luxury
sector. We also believe that, despite increasing conduct goods. High margin items such as spices and fine chinaware
and product regulation, the core economics of UK retail attracted the attention of the Portuguese, Dutch, Spanish and
banking are likely to remain amongst the most attractive in English who established permanent settlements with the hope
Europe; a fact that has been largely obscured by the furor of becoming trading partners with China. However, the 1000%
around past mis-selling issues and the well documented margin on certain spices also made it worth taking the risk of
problems of the UK banks’ wholesale operations3. bypassing the land-based trade routes that crisscrossed China
and instead take to the seas to go directly to the Spice Islands.
3 Refer to Oliver Wyman report “Perspectives on the UK Retail Banking Market,”
November 2012 for more detail
Exhibit 6: Expected banking revenues in major markets at the end of the decade
Revenue in 2020
% of world
revenue 30% 28% 4% 38%
(estimated)
Americas Europe Middle East Asia and Oceania
and Africa
17
Regulatory restrictions on foreign ownership, Trading not colonizing
licensing and market participation present
Many empires like that of the Spanish in the
major barriers that can be difficult to circumvent.
For example, foreign participation in the Americas were built on conquest, but some of
Chinese market remains low due to regulatory classical history’s most successful commercial
restrictions (although that hasn’t stopped empires were built on the idea of free trade.
many Western institutions from making The Phoenicians dealt in commodities such as
sizeable equity investments in Chinese banks). wood, glass and Tyrian purple dyes, but they
Regulation can also impose requirements that actively avoided hostilities with their commercial
dampen economic attractiveness either in home partners. Instead they focused on wealth
markets or target foreign markets. Most of the creation by dominating the southern shore of
emerging regulations, such as Basel III or Dodd- the Mediterranean and coexisting with the
Frank, are moving in this direction and in some Greeks who focused on the northern shore.
emerging markets interest rates and capital Although the Phoenician trade infrastructure
restrictions can directly impact the “outside- was initially based on a scarce specialized
in” economics of the banking business. product (the Tyrian dye), over time they added
precious metals and other goods to their
Broader market stability concerns also need distribution network. As merchants, they
to be considered. In developed markets the deployed diplomacy rather than firepower to
level of central bank intervention and the long- expand their reach. They also recognized the
term interplay between fiscal and monetary value of technology in protecting and increasing
policy remains uncertain. Despite the certainty the productivity of their trading routes with
that interest rates will eventually rise, the innovations (mostly borrowed from other
timing remains uncertain and any strategy cultures like the Egyptians) such as mechanical
predicated on rising rates could have material clocks, harbor cranes, the dry compass and
short-term downside. While emerging stern-mounted rudders all playing a role in
markets have increasingly implemented keeping them ahead of the competition.
sound economic policies and built stronger
institutions to reduce volatility, many of these All banks, and especially those that are
measures focus on taxes and limits on foreign inclined to adopt a ‘trader’ rather than a
investment flows, which again potentially limit multi-domestic international strategy, will
the attractiveness of foreign bank expansion. benefit from understanding bilateral trade
and investment flows – both their direction
The final structural factor is around the and their size. Corporate clients today have
broader market framework – primarily the increasingly international needs driven by a
rule of law and market infrastructure. The more global customer and supplier base and
data clearly indicates that markets with increasingly international supply chains. In
a weak rule of law and poorly defined or some geographies and customer segments,
enforced property rights struggle to develop enabling international transactions has
a market for long-term credit products become table stakes. We identify three
such as mortgages. But probably more broad areas of opportunity for the ‘traders’:
important for potential foreign entrants are enabling trade flows around the supply
corruption, money laundering and other chain, financing longer-term foreign direct
dubious activities, which may pose serious investment flows and facilitating remittances
reputational or regulatory risks. and individual wealth flows.
20%
Global avg
trade growth=20% APAC-APAC
16%
South-APAC
North-APAC
12% APAC-North
APAC-South
North-South <5%
5%–10%
4% South-North
North-North
10%–25%
25%–50%
~ 300 $BN
0% 2011 trade volume
>50%
10% 20% 30% 40%
GROWTH IN TRADE VOLUMES (2009–2011)
Note: North” includes Western Europe, the US and Canada; APAC includes Japan, East Asia, South Asia, South East Asia, and Oceania; “South” includes the rest of the world
Source: IMF, UNCTAD, Oliver Wyman analysis
19
in a reprise of its position centuries ago. An spans multiple customers. A number of Asian
estimated 60% of trade flows will have Asian banks are moving vertically along the supply
involvement when compared to Europe’s chain to provide this type of financing for
40% by the end of this decade, so any ‘trader’ import and export partners and are seeking
strategy without a strong Asian presence is to dominate certain bilateral trade routes in
unlikely to be a good long-term bet. specific industry segments.
Given that customers are increasingly pursuing While long term FDI is still dominated by flows
business abroad or sourcing product from within the developed world, the projected
overseas, banks have an opportunity to need is primarily in high-growth emerging
expand alongside their clients by providing markets. For internationally ambitious
financing, transaction banking, and wealth banks there are opportunities to provide
management services, ideally capturing services at both ends of these investment
both ends of the transaction. There is also flows. Many specialist infrastructure
increased demand from smaller businesses players are expanding internationally to
for international products and services as the provide opportunities for their customers
internet-enabled world is allowing even small to invest in markets with growing private
businesses to develop both foreign suppliers and public construction industries. There is
and customers. As a result, an increasing also a trend for long-term developed world
number of domestic players worldwide are investors such as pension funds to make
developing a suite of international banking direct “real asset” investments in emerging
products. The challenge is to develop cost- markets, forcing the banks to move from
effective options to serve smaller clients; being a funding intermediary into an
hence the white labeling of FX and trade- advisory and facilitation role that is more
finance products to primarily domestic fee income than balance sheet-oriented.
banks is a growth area. The success of
this type of strategy may also be limited Clearly, if you are a ‘trader’, analyzing these
over time by the lack of domestic cash types of flows is a vital step in developing an
management and payments infrastructure international strategy. Grouping countries
and hence it may be natural for a trader based on inter-connectivity can also facilitate
strategy to evolve into a multi-local model or better cross-border coverage and execution.
a formal alliance structure with a local bank There may also be opportunities to enhance
in order to effectively serve customers. the scale of business across smaller
markets with centralized operations and
Moving beyond single customer management, for example, taking advantage
enablement, there are also opportunities of Middle Eastern free trade zones to create
along the full supply chain where a single regional trading hubs.
institution takes an end-to-end view that
Capabilities
Without technological innovation, the Age of Discovery wouldn’t have
been possible. With the invention of the compass and the sextant,
navigation now relied on mathematics instead of celestial observation.
Shallow draft Mediterranean ships also evolved into ocean-going
carvel ships with a planking method that enabled a stronger hull and
fully-rigged masts. In the annals of the great explorers, there is clearly
a survivor bias that reflects superior capabilities - both technical and
personal - as no one memorialized those adventurers whose masts broke
and hulls cracked somewhere in the great Southern Ocean.
Business synergies are created when a new venture can leverage current
operations. Cost synergies are particularly important in scale businesses
such as payments or transaction banking, where shared services and
transferable human capital can be deployed in new markets with only
23
minor tweaks. Synergies may also be realized The confidence to enter new markets can also
if new markets are material trading partners be based purely on operational excellence that
with a bank’s domestic home base, raising the cuts across products and customer segments.
probability that a new entrant can capture both In retail banking, the difference in cost-income
ends of a transaction. Standard Chartered’s ratios between leaders and laggards can be
build-out of its international trade finance measured in tens of percentage points, so
platform through investments in technology there is scope for operational excellence to
as well as select portfolio acquisitions is serve as a key differentiator and profit driver.
an example of international expansion Experience offering high service levels with
capitalizing on synergies across markets. Over thin network and direct banking models can
time, this strategy has built scale and achieved also offer the opportunity to leapfrog existing
critical mass, which in turn has generated a bank branch network models and become a
strong track record of double-digit growth. disruptor. For example, in the North American
retail market the ability to harness customer-
Strong product design and product facing technology to reduce branch network
management capabilities can also provide costs while increasing perceived service levels
a rationale for international expansion. A is emerging as a key differentiator. Canada’s
proven ability to achieve economic returns TD Bank is using its own experience plus what
where others struggle can transform a it gleaned from its acquisition of Commerce
superficially unattractive market into a Bank in the US to roll out branch performance
viable expansion opportunity. A good initiatives simultaneously on both sides of the
example of a product-led strategy is US border. In wholesale banking, strong cross-
Bancorp’s specialist merchant services arm, border payments or trading platforms can offer
Elavon, which has developed a significant distinctive execution abilities and the hard
international presence by leveraging its lessons learned from past M&A can also confer
relationships with airlines and hotels and advantages when buying into new markets.
offering dynamic currency solutions that
reduce FX costs for those merchants. An important but softer capability relates
to culture. When considering international
Service expertise can also be a viable expansion, national culture can be a double-
platform for market entry. The private wealth edged sword, but it can be leveraged as a
and HNW customer segments are examples capability. When the target market has a similar
of businesses where brand and history can culture, synergies increase as business practices,
play a major role in shaping customers’ product expertise and human capital become
perceptions of competence and service more transferable across borders. Institutions
quality (sometimes unduly). HSBC Premier who can use existing infrastructure and time-
is a clear example of an international affluent tested operations with minor adjustments, can
banking proposition that leverages brand create both structural and economic advantages
and a global service platform to tap into vis-à-vis other entrants. While dissimilar in
this profitable segment across markets. On many ways, the cultural linkages between Spain
a smaller scale, Scotiabank’s stated intent and Mexico have made the latter an attractive
of targeting affluent Asians investing in expansion market for major Spanish banks.
Canada in collaboration with local Chinese
institutions is another example of a bank While familiarity with national culture can
taking a service-led and segment-specific be an important capability, the same can
approach to penetrating a foreign market. also be true of a bank’s own internal culture.
25
that has dipped in and out can confer its own advantages Impact of capabilities and
over the long term through both legal positioning and constraints on the market map
well-developed relationships with local regulators and
politicians. The flip side of course is that those who A clear sighted understanding of both capabilities
are late to the international party can suffer from a and constraints will change the way a bank views the
structural disadvantage that is very difficult to address, attractiveness of a particular international market. Some
as evidenced by the bidding frenzy for new banking impacts will be positive and some will be negative, but
the important thing is that there is a disciplined and
licenses in India.
comprehensive attempt (as indicated in Exhibit 8) to
Finally, the double-edged sword of culture can also understand the full range of issues and their net impact.
be an under-appreciated constraint. The history of
In Exhibit 9, we try and give some examples of how
international banking is littered with the careers of
this exercise can change the international map
ambitious executives who strongly believed that “if it
for a specific bank and alter the perception of a
works here it will work there” and saw their careers cut
market’s attractiveness.
short as a result. Even when there are strong surface
similarities of culture and language, the true business •• Regulatory barriers that make certain markets
realities can often be very different, as many of the unattractive may not be as relevant for players with
UK banks found with their forays into US retail and an existing presence in those markets. For example,
commercial banking in the 1980s. When an institution banks with a banking license or grandfathered rights
has limited experience with international expansion, any in a typically closed market such as India may not
synergies predicated on cultural overlap should come consider these markets as structurally unattractive as
with a health warning. a de novo market entrant would.
27
4
Charting A Course
Clearly, the search for a value-adding international banking strategy
has no single answer and no silver bullet. Defining an international
strategy is a complex process and each bank comes to the question
from a unique starting point. However, that being said, we do think
there are some strategic models that are worth considering as
examples of how different types of institutions have resolved this
challenge and charted a distinctive course. The four archetypes we
discuss in this section are certainly not comprehensive (and in some
cases not even mutually exclusive), but we do think it is instructive to
walk through how a specific strategy can emerge from the interplay
of broad market opportunities and bank-specific factors. None of
these case studies are intended to represent the strategy of a single
real institution, but they are intended to be specific enough to be
able to draw parallels to real world examples rather than just be
theoretical exercises.
29
RETAIL REPLICATOR opportunities for more agile replicators who embrace new
business models such as thin network or fully mobile banking
“Retail Replicators” aim to export domestic retail success to
in markets where mobile is already transforming society. In
international markets. A ‘glocal’ like HSBC and other multi-
many cases rather than just replicating a successful business
local players such as Citi, Standard Chartered, Santander and
model, new markets can be the opportunity to evolve and
BBVA exemplify this strategy. The genesis is often a successful
improve the model without the fear of cannibalization that
full-service domestic bank recognizing that it has hit a
often plagues a home market. In the case study below, we
market share ceiling at home; that earnings will stagnate as
outline the strategy definition process for just such a bank –a
a result; and that looking overseas may offer opportunities to
large developed-market leader that is looking to diversify its
duplicate domestic success. Going forward, we see increased
earnings via a twin-home market retail strategy.
SITUATION
A large North American domestic with a broad retail proposition operates as part of an oligopoly in its home market. The home market is
extremely saturated in the retail segment with limited capacity to capture share from other players. The bank is well capitalized and is seeking
expansion opportunities outside of its home market.
CAPABILITIES
Business synergies •• Potentially leverage existing human capital and operations due to similarity in cultures through e.g. transfer of staff,
retraining, operation shifts
Product strengths •• Strong retail proposition: longer business hours, additional banking services at branch increasing engagement,
alternate language offerings, cutting-edge mobile and internet offerings
•• Strong reputation for quality of service to retail customers with increased customer stickiness
Customer •• Good understanding of mass affluent/high net worth customers in providing services for retail banking, and wealth
segment advantage and asset management
•• Expected cross-sell opportunities with cross-border customers
Execution/inorganic •• Superior execution managing large retail branch networks and achieving above average margins and high
growth advantage branch utilization
STRATEGY
Footprint •• Expand into US due to risk-return alignment, market size and cultural similarities
•• Operate internationally under a twin-home model but adopt a thin-network approach in the US with more emphasis
on mobile technology and remote servicing
•• Potential for continued expansion into select attractive markets may be considered in the long-term – move towards
a multi-local bank
Entry •• Enter through mid-sized retail bank acquisition with regional reach / key MSA coverage
•• Rebrand branches, restructure branch infrastructure/ layouts, and deploy retraining programs to align with winning
business tactics
Competitive advantage •• Operate US branches, applying executional know how to achieve above average utilization rates
•• Expand outside of core market using thin-branch network model to target attractive MSAs
•• Use well-run traditional branch network as foundation for aggressive mobile and thin-network expansion which also
provides important learnings for management of home country bank
CONSTRAINTS
Culture •• Strong preference for countries with common language and cultural affinity
Risk/return requirement •• Low to moderate risk profile preferred
•• Aim to keep returns broadly in line with current business model
Investment capability •• No constraints due to recent sale of toxic assets after financial crisis
and time horizon •• No explicit regulatory constraints in home market
Regulatory restrictions •• Regulatory reform in home market may negatively impact revenues and increase compliance costs
5 As of March 2013
Category Killer with partnerships and processing agreements in countries
as diverse as Poland, Turkey and China. While it is natural
In contrast, “Category Killers” are specialist players who use
for domestic category killers like First Data to adopt the
their product or sector dominance to expand internationally.
same model overseas, this play can also be used by broader
In asset management, Blackrock has capitalized on its scale to
domestic institutions that recognize that their best chance of
expand outside the US into 27 countries, with ~40% of its total
being successful internationally is to play to a specific strong
$3.9 TN assets under management attributed to international
suit; which in the example below is payments processing.
clients. CME Group has expanded from a domestic US
Given the rapid advances in payments technology,
commodities exchange to become a global derivatives
international expansion can also be an opportunity to skip a
powerhouse that has benefited from post-crisis regulatory
generation from a technology perspective and experiment in
requirements for central clearing. And while payment
a controlled way with new approaches that may be applicable
solutions provider First Data still derives the majority of its
in home markets if they prove successful overseas.
revenues from the US, it continues to grow internationally
SITUATION
A large North American regional universal, with most operations confined to US and Canada, is re-evaluating its international strategy post-
crisis. Its primary international presence is through its specialist merchant acquiring arm. Due to impending saturation in the US and European
markets, where the merchant arm maintains significant market share, the bank is seeking further growth opportunities in new markets.
CAPABILITIES
Business synergies •• Internationally enabled payment processing platform that can be easily adapted and leveraged in multiple markets
Product strengths •• Specialist arm leverages robust cross-border payment processing platform with strong fraud management system
•• Experience in developing regional payment solutions
•• Innovative mobile payments offering with experience in increasing merchant take-up
Customer segment advantage •• Strong understanding of SME sector with tailored solutions for banking and payment needs
Execution/inorganic •• Successful track record in smaller acquisitions
growth advantage •• Numerous successful partnerships in the payments business domestically and in Europe
STRATEGY
Footprint •• Target markets have established payments infrastructure, favorable regulatory environments and dynamic
retail sectors
•• Expansion into neighboring markets such as Mexico, Brazil and potentially other LatAm markets, with double
digit annual credit card growth
•• Operate under hub-and-spoke model to centralize processing and capture volume through global banks
Entry •• Partnerships or joint ventures with global banking institutions and local players to benefit from established
brand recognition during initial entry
•• Acquire local payment solutions providers in markets with limited participation by global banks
•• Drive technology innovation in the local payments market without fear of cannibalizing an existing business
•• Over time use payments and merchant acquiring relationships and the data that flows from them as a basis for
developing innovative small business lending products
Competitive advantage •• Deploy IT platform and processing systems
•• Continue to explore and innovate payment and mobile products, utilizing SME know-how to deliver specialized
solutions to small merchants
CONSTRAINTS
Culture •• Not considered as a constraint as entry model adapted to minimize cultural differences
Risk/return requirement •• Scale is priority over return in short term to gain market share in new markets
Investment capability and •• No investment constraints given strong capital base
time horizon •• Long-term time horizon necessary to achieve scale
Regulatory restrictions •• Regulatory reform in home market may negatively impact revenues and increase compliance costs
31
Cultural Connector in Côte d’Ivoire, Mali, Burkina Faso, Guinea, and
“Cultural Connectors” have strategies predicated on Senegal. In today’s changing environment, cultural
regional, cultural or trade-flow led links. We’ve already affinity can go beyond the obvious to newer types of
discussed Santander’s leverage of a common language cultural understanding such as the buying patterns of a
and culture to expand from Spain across South America. particular HNW wealth segment or at the other end of
Another good example in the region is Bancolombia the spectrum the social media behavior of millenials in
which has expanded into Panama, Guatemala, and El Asian markets like South Korea and Taiwan. The Cultural
Salvador, capitalizing on common culture and strong Connectors not only have confidence in their ability to
regional business links to diversify its footprint and understand and operate a good business model in a
create growth options. In Europe, French player BNP market but they also often leverage historic political and
Paribas has maintained a banking presence in colonial business links to help them overcome barriers to entry
French-speaking West Africa, with retail operations and constraints that may be off putting for those not
familiar with the culture they are entering.
SITUATION
A top 20 Latin American bank has a leading position in both retail and wholesale segments of its home market. The bank has a strong
capital base and can access international capital markets (both debt and equity). Due to the high concentration of profits generated
from the home market, the bank seeks geographic diversification.
CAPABILITIES
Business synergies •• Potential for cross-selling given broad range of products developed in home market
•• Access to international capital markets provides lower funding costs, which can be leveraged in other countries
Product strengths •• Large variety of specialized retail and commercial banking products
•• Service-oriented proposition
Customer segment advantage •• Universal banking model with experience across all segments (retail, wholesale, capital markets, insurance, pensions)
STRATEGY
Footprint •• Expand in Latin America given common language, cultural affinity and trade flows
•• Preference for smaller countries with less developed banking sectors and lower competition due to past
successful experience in home market in similar conditions
•• Operate under a portfolio model
Entry •• Expand through acquisition to build scale more rapidly and benefit from short-term growth and margins
Competitive advantage •• Leverage retail and commercial banking expertise to gain competitive advantage by implementing best
practices developed in home market
•• Improve funding opportunities for target acquisitions through capital markets access
CONSTRAINTS
Culture •• Strong preference for countries with common language and cultural affinity
Investment capability and •• Despite strong capital base, large transactions would require raising additional capital
time horizon
SITUATION
A mid-sized bank in a large developed market with strong position in the SME/middle market segment. The bank does not
operate in foreign countries, but its customer base is increasingly global: local clients are now dealing with international suppliers
or customers while, at the same time, foreign multinationals are establishing subsidiaries in the bank’s home market. The bank
seeks to adapt to its changing customer base.
CAPABILITIES
Business synergies •• No significant international synergies
Product strengths •• Strong products for local SMEs and middle market companies
•• However, weaker product offerings for customers conducting international businesses
Customer segment advantage •• Strong position and brand with middle market companies and SMEs
Execution/inorganic •• Lack of presence in foreign markets suggest, low execution advantage
growth advantage
STRATEGY
Footprint •• Stay in home market, which remains attractive given market fragmentation and large potential in the
underserved SME segment
Entry •• Potential for white-label partnerships with other domestic players to expand product offerings
Competitive advantage •• Defensive strategy to retain current customers and enable growth of their global businesses:
−− Expand product mix to offer multi-currency accounts payments and FX solutions
−− Expand corresponding bank network to increase reach of trade finance capabilities
•• Offensive strategy to expand customer base domestically, delivering core commercial banking products
(e.g. lending and treasury) to subsidiaries of foreign companies entering home market
CONSTRAINTS
Culture •• Lack of experience operating in foreign countries
•• High sensitivity to political and economic stability
Risk/return requirement •• Low risk and moderate returns preferred
Investment capability and •• Capital base under some pressure due to increased regulatory burden
time horizon
Regulatory restrictions •• Higher regulatory burden in home market
33
Concluding Thoughts
Given the regulatory drive towards localization and the A structured and disciplined approach that combines
wounded state of the banking industry in much of the accurate market information and a strong awareness of your
developed world, it may seem counterintuitive to be own strengths and weakness as an organization will serve
discussing international strategy. However, for many high- an institution well in the long run. Given the potential of the
performing institutions in consolidated markets the time to global economy, opportunities for international growth do
look abroad is now if they want to sow seeds to be harvested clearly exist. The starting point will make a big difference to
in 2020. With the prospect of sustained low economic growth the relative attractiveness of those opportunities, but this
and low interest rates in much of the developed world, may be a point in time where fortune favors the brave and
international expansion provides a route to deploying capital where an institution can make its own luck by being better
in high-growth markets and creating diversified earnings. informed and more self-aware than its competition.
Regardless of where you are starting from, the challenge The map of market opportunities is available to everyone.
can look daunting and fraught with risks. For every success What will separate the winners from the losers is more
story, the history of international banking is littered with likely to be a well-articulated understanding of institutional
failures and aborted expansion attempts. The next big thing capabilities and constraints and the willingness to
has often turned out to be a bear-trap of regulatory and maybe take the path less travelled based on that self-
cultural complexities that can absorb huge investment for awareness. The key will be in identifying where and how
little return. An analysis of the common pitfalls indicates that as an institution you can bring something distinctive to a
focus and discipline are absolutely essential. So the decision specific market or customer segment. Even if the current
to rethink international strategy must be approached with answer is no, a proactive review of your international
objectivity and caution. For banks still dealing with the portfolio strategy will at a minimum ensure that you are well
aftermath of the crisis, it may make perfect sense to focus on positioned to react to opportunistic situations as they arise.
rationalizing and optimizing your existing business footprint
and possibly retrenching from current international markets. Key steps in this type of review should include:
However, for multi-locals in positions of strength and even
•• Clarifying the rationale, ambition and objectives
for successful domestic institutions with no international
of an international strategy including the financial
footprint, evaluating the alternatives in the “new normal” will
parameters and constraints
ensure they go forward with their eyes open. For some, this
may lead to a positive decision on international expansion, •• Creating your own explorer’s map that takes an
while for others the best course may indeed be to stay home objective view of global opportunities
and concentrate on the domestic franchise.
•• Inventorying your current business and customer
portfolio across geography, product scope and client
franchise to truly understand your assets
•• Identifying other ‘hidden’ capabilities and constraints
that could modify market attractiveness either positively
or negatively
•• Applying your bank-specific lens to the explorers map
to understand where you may be advantaged and have
an edge versus your competitors
•• Figuring out if the resulting opportunity set satisfies
your financial constraints and hopefully prioritizing
among a wealth of options
AmericaS
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www.oliverwyman.com