Foreign Ownership

Strengths & Weaknesses

 Foreign Owned Banks

Should foreign owned banks be analysed as a

sub-set of their parent or as separate entities?
How large is the shareholding?
Difference between 100%, majority and minority.
Need to consider stability of future ownership.
Do not assume that shareholder structure will not
change in the future.
Consider impact of global macro-economic trends
and developments on shareholder structure.
Do local regulatory & legal issues change your
perception?
 Central & Eastern Europe
Foreign banks set up subsidiaries from 1990
onwards.
Foreign banks began to buy locally owned banks
from about 1998 onwards.
Many countries are now dominated by foreign owned
banks.
Remaining regional banks now expanding cross
border.
OTP in particular.

Share of banking sector assets

controlled by foreign banks in
the new member states
2003 (%)
Source: ECB
 Latin America
Mexico most receptive to foreign
ownership.
Most large Mexican banks now foreign owned.
Penetration of foreign ownership in Mexico
resembles that in Central & Eastern Europe.
Foreign banks involved in privatization.
e.g. regional state banks in Brazil.
 Asia
Least receptive region to foreign ownership.
Most foreign ownership developments were in response
to 1997 Asian crisis.
Often foreign banks were limited to taking a minority stake in a
major bank, often as part of a rescue bid.
China being forced to open up market to foreign
ownership as part of WTO membership.
Japan still essentially closed to foreign ownership.
South Korea is gradually accepting more foreign banks
as key shareholders of mid to large sized banks.
 Types of Investor I
Commercial Banks
The most strategic of possible investor.
Does their investment represent part of a strategic,
regional development?
e.g. Scandinavian banks in Baltic States
Greek banks in Balkans
Austrian banks in Central Europe
HSBC in China
How good is the cultural fit?
e.g. BSCH/BBVA from Spain have expanded into Latin
America. Good historic/cultural fit.
 Types of Investor II
Private Equity Funds/Hedge Funds
Never strategic.
How long is their investment horizon?
Possibly more interested in buying portfolios of bad loans than
whole banks.
Might buy bad bank, turn it around and resell.
Success of strategy depends on buying bank at suitably deep
discount.
Strategy works best if local regulator provides a put
option/guarantee for bad loans to be removed when recognised.
Often there is little true transfer of risk to this type of investor,
although the perception might be that they are taking
considerable risk.
 Example:
Shinsei Bank, Japan I
Originally Long Term Credit Bank of Japan
LTCB failed in October 1998
Height of post bubble economic downturn.
LTCB was not house bank to any large corporate.
Tended to be lender to syndications organised by
other banks.
Usually only 3rd or 4th largest lender to any given
corporate.
 Example:
Shinsei Bank, Japan II
LTCB nationalized October 1998.
Capital injection of Yen 3.6 trillion.
Problem loans of Yen 4.2 trillion removed.
March 2000 bank re-privatized.
Equity investors led by Ripplewood LLC.
American private equity vehicle led by Christopher Flowers, ex-
Goldman Sachs banker.
Other shareholders included:
Mellon Bank, UBS Painewebber, GE Capital, ABN Amro & Deutsche
Bank.
This investor group was never a long term strategic
shareholder.
Government provided a limited term put option for
problem assets.
 Example:
Shinsei Bank, Japan III
Exit Strategy
IPO Planned For Early 2003.
IPO Delayed, but Executed in February 2004.
Privatization investors booked huge profits.
Original investor retain 64% of common equity, which will be sold
in future.
Bank repositioned in retail and SME market.
Management accused of aggressive work out of problem
loans.
Experienced international (mainly US) manager bought in to turn
bank around.
Securitization (CDO) techniques used to reshape balance sheet.
Strong, young Japanese graduates hired.
New risk management processes introduced.
 Example:
Korea Post Asia Crisis I

After 1997, troubled banks nationalised and then

sold to US based private equity funds.
In 2004 funds started to sell out:
Newbridge Capital sells 51% stake in Korea First Bank to
Standard Chartered (now 100% owner).
Carlyle sells minority stake in Korea American Bank to
Citibank, which merges bank with Citibank Korea.
Lone Star still to sell 50.53% stake in Korea Exchange
Bank. Lock in period ends October 2005.
 Example:
Korea Post Asia Crisis II

May 2005 Bank of Korea think-tank (Institute for

Monetary & Economic Research) tells government not to
sell any more banks to private equity funds.
With particular reference to states 80% stake in Woori Bank
(Koreas 3rd largest lender) due for sale later in 2005.
Finds that efficiency has improved more at locally owned banks
in recent years.
Considers private equity funds help short term financial stability,
but do not contribute to longer term efficiency gains.
 Types of Investor III
Specialist Banks
Micro-Finance
Relatively new area.
Major international banks have limited expertise.
Pro Credit network now dominates this sector in many emerging
markets and is experienced in using IFI funds.
Consumer Credit/Credit Cards
Bring expertise in markets where this product is underdeveloped.
US/UK firms probably have most expertise.
Investors are often risk averse and will not enter markets until they are
certain that they are ready for development of this product.
Initial development of joint ventures in this product area likely.
Banks may also buy non banks in this sector.
e.g. Bank interest shown when significant stake in Japans Takefuji
consumer credit company was sold in 2004.
 Types of Investor IV
Non Bank Financial Institutions
Large conglomerates with financial interests
GE Capital
Typically interested in leasing, consumer finance, credit cards.
Banks in CEE, such as Budapest Bank, were first universal
banks to be owned by GE.
GMAC
Aside from car loans, significant mortgage lender, usually more
in the sub-prime area of the market.
Major activity in UK mortgage market.
Expected to seek further international expansion.
Car Manufacturers
Specialist auto finance banks.
Likely to be a trigger for securitization in many of the markets
in which they operate.
 Regulatory Issues I
If looking at an international subsidiary, always be
careful to work out who the responsible regulator is.
Under current rules, main regulator for capital
adequacy is usually the HOST regulator.
HOST regulator will usually seek some form of
comfort letter regarding adequate capitalization of the
subsidiary by the parent.
Comfort letters usually have no legal standing.
Moral obligation/Reputational Risk usually more important.
 Regulatory Issues II
Basel 2 introduces new regime to reduce regulatory
burden on large multi-national groups.
HOME country regulator will become responsible for all
capital adequacy issues.
HOME country capital rules will apply to all subsidiaries
in the group.
Result of this calculation will be reported to HOST
country regulators, but they cannot set their own
requirements in addition.
Could undermine regimes stricter than the international
minimum.
e.g. Albania requires 12% minimum capital adequacy ratio, but
has mainly foreign owned banks who will see this ratio fall to 8%
post Basel 2.
 Regulatory Issues III
Market related issues must remain the responsibility of
the country in which the market is based.
In particular LIQUIDITY must remain regulated by the
HOST country regulator.
However, foreign owned banks might have access to stronger
liquidity from the centralized treasury desk of their group. This
could provide some morale hazard to HOST country regulator.
In a crisis can the requirements of the IMF override the
requirements of the HOST country bank regulator.
IMF might over-rule regulatory decisions about which banks
should be supported.
 Lender of Last Resort
Who is the effective lender of last resort?
For most banks it is their national government, working
through the Central Bank.
Is the government allowed to support the bank?
Could IMF or EU state aid rules prevent this happening?
For foreign owned banks, the main international
shareholder is another key provider of capital support.
How important is the local subsidiary to the global operations of
the parent bank?
Would there be any reputational risk of the parent not supporting
the subsidiary?
Are there any legal issues which the parent could hide behind to
not support the subsidiary?
e.g. Argentina.
Impact of Home Country Issues
on Host Country Subsidiary

Home country issues could result in an international

bank changing its strategy for its subsidiaries.
Economic problems in home country might force banks to
sell profitable subsidiaries abroad to support their capital
position in their home markets.
Pressure from shareholders to boost returns might lead to
the sale of underperforming international banking
subsidiaries.
Volatility from international investments might un-nerve
shareholders of the group.
Possible risk for Spanish banks who have invested heavily in
Latin America.
 Advantages I
Funding.
Centralized treasury desks can on-lend cheaper funds within
the group.
Group expertise might help subsidiary banks take advantage of
securitization markets.
In a crisis, foreign owned banks tend to benefit from flight to
quality effects.
Risk Management.
Parent bank usually develops risk management expertise at
subsidiary banks.
Risk management improvements at foreign owned banks can
lead to overall improvement in risk management throughout the
market.
 Advantages II
Product Development.
Product development usually accelerates after arrival of foreign bank
as a shareholder.
Some products designed by the group can be offered directly in
international markets, removing local product development costs.
Other products may need some adaptation to each market, which
requires some local product development spend, but these will be
lower than designing the entire product.
Information Technology & Outsourcing.
Economies of scale when large international groups buy new
hardware and software.
Development costs can be shared through the entire group.
Some processing can be centralized cross border in one location.
Other.
Training can be centralized.
 Disadvantages
Risk Management.
International techniques may result in an unnecessarily risk averse
business approach in some emerging markets.
International risk management may place too much emphasis on market
liquidity and collateral valuations which do not apply in all markets.
Product Development.
Over-reliance on the shareholders off-the-shelf product may mean that
local banks miss some profitable opportunities which require more
customized products.
Marginalisation.
Could the local bank become marginalized in its own country, as its
management are less in touch with local market needs, as they
constantly try to please head office?
Cultural Differences.
A successful management team is likely to blend local and international
expertise.
Too much reliance on local management might lead to misunderstanding
with the shareholder.
 Conclusion
Given advantages & disadvantages to foreign
ownership of banks:
Ideal situation is mixed ownership:
Some subsidiaries of foreign banks, some banks with
minority foreign ownership and some locally owned.
Care must be taken to structure limits within
international banking groups accordingly.
For longer dated exposures, do not automatically
assume that ownership of the subsidiary will not
change.