by NR INDRAN

Mumbai : Banks around the world are eagerly eyeing opportunities in the emerging markets, according to a recent survey of banking executives by KPMG International. But while emerging market institutions will likely see continued strong growth in domestic markets, western banks will find success in these markets to be a slow and cumbersome process.

Emerging market respondents overwhelmingly prioritized domestic growth over international expansion. Citing strong opportunities remaining in their domestic markets and the relative high cost of pursuing foreign growth, most emerging market banks suggested their international expansion plans were limited to either satisfying the international requirements of their domestic corporate customers or servicing their nationals living abroad.

The allure of the emerging markets

The KPMG study entitled Bruised but not broken: the global banking growth agenda, finds that many banks based in relatively mature and saturated western markets are increasingly looking at the emerging markets for their growth plans.

From an Indian perspective, Mr. Abizer Diwanji, Head of Financial Services, KPMG in India said that “The 8 to 9 percent GDP growth of India necessitates a 20 to 25 percent credit growth locally.  With evolving regulations, a rising interest rate scenario and growing credit demand (especially for Infrastructure, Real assets and SMEs), Indian banks are focused on efficient credit delivery rather than pursue overseas expansion in the near term.  However, over the longer term, Indian banks would gain size and currency capabilities with overseas forays which today is restricted to serving Indian clients and diaspora.”

“Given the relatively slow growth rates in the mature and largely saturated western banking markets, it seems hard to avoid the conclusion that any bank not active in Asia, Africa or Latin America will be consigned to the ‘slower grower’ category,” said Stuart Robertson, a partner with KPMG in Switzerland and the Banking Sector Lead for Transactions and Restructuring with KPMG Europe LLP.

Respondents to the survey identified a number of key markets that displayed the highest growth potential. These included:

Asia: Not surprisingly, interviewees overwhelmingly cited China, with India as a second favorite. But in both cases, respondents also noted strong concerns about the potential for foreign banks to penetrate the market and build scale. Indonesia was also frequently mentioned as a market with significant banking potential, though far fewer interviewees were actively pursuing opportunities there than in China or India.

CIS and Eastern Europe: Russia is seen as having great potential but is considered by many respondents to be a difficult market in which to succeed, largely due to the significant dominance of the two largest state-owned banks. However, with only one in four Russians having a bank account, Russia seems to have considerable retail potential. In Eastern Europe, Poland was also singled out for particular attention.

Latin America: Many respondents see strong opportunity in Latin America, but suspect that the market will be largely dominated by regional players from either Brazil or Colombia (the latter particularly in the north of the continent). However, the Latin American opportunity has not been overlooked by western banks, with institutions such as Santander and Citicorp reporting significant proportions of their revenues and profitability being generated by their Latin American operations.

Africa: As the continent’s most populous country, Nigeria attracts the most attention from worldwide banking leaders. For its part, Nigerian banks have also seen substantial consolidation over the last decade and now a number of its banks are eyeing expansion across West Africa and further afield. In part due to its political stability, transparent legal system and relatively good infrastructure, many see South Africa as the entry point into the continent.

“For foreign banks to achieve success in the emerging markets requires a great deal of time, patience and investment, as well as a solid and clearly articulated unique selling point. Banks looking to generate quick returns may risk severe disappointment,” suggests Edwina Li, a partner with KPMG in China. “Opportunities for foreign banks are there, but it requires patience. It is not a quick profit generator.”

Regulatory change slows ‘Big Ticket’ deal-making activity in the West

According to the report, regulation is increasingly impacting the growth agenda of banks in the West. Operating model changes driven by regulatory considerations are yet to play out in full, and therefore some larger players report continued focus on non-core disposals or portfolio shuffles in order to build scale in key jurisdictions.

Indeed, many banks are now dealing with greater capital and liquidity requirements, reduced profitability and rising costs of regulatory compliance. Global banks would appear to be at an advantage if they can maintain scale at a country level, as sharing platforms across countries can contribute significant cost savings. But regulatory trends look likely to disadvantage banks that are present in multiple jurisdictions. Basel III, for example, may penalize banks that are unable to secure local funding, which may impact more the multi-national banks if an individual country operation lacks critical mass.

Meanwhile, banking M&A looks likely to continue being dominated by domestic deals, fuelled over the coming years by consolidation among second-tier banks in the U.S.A., China, Germany and Spain, among others.

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