Following a retrenchment of overseas operations by numerous major banks, how are firms in emerging markets responding?


The three decades before the 2007-08 global financial crisis were marked by the world’s financial networks becoming increasingly interconnected. Financial system regulatory convergence, the growing penetration of World Trade Organisation rules and the creation of currency unions, such as the euro, resulted in a surge in cross-border capital flows. Global banks began to see the emergence of a single global marketplace, and the potential this held for revenue and asset growth. In 1998 co-chairman of the freshly formed Citigroup, Sandford Weill, announced the dawn of a new age of banking in which large institutions would act as financial supermarkets to the world, with their activities so diversified that they would be able to withstand downturns of the global economic cycle.

Citigroup was not alone in this view: major financial players such as the Royal Bank of Scotland (RBS), Deutsche Bank, BNP Paribas, Barclays, HSBC, Crédit Agricole, UBS, Bank of America, Société Générale and JPM organ Chase grew their international businesses on the back of a rising tide of global capital, which saw cross-border transfers rise from $500bn in 1980 to a record high of $12.4trn in 2007.

Disappearing Act

The global financial crisis which started that year, however, brought an end to this trend. According to data from McKinsey Global Institute, cross-border capital flows had declined by more than 80% from their peak by 2009, reduced to a level lower than seen in the early 1990s. By 2016 cross-border capital movement had risen to $4.3trn, above the level in the late 1990s, but still 65% lower than the high of 2007.

During that period, banks offloaded foreign assets acquired during boom years, and the foreign claims of banks in the eurozone slumped by $7.3trn, or around 45%, as a direct result of this de-risking process. The primary driver of this trend was a reassessment of risk attached to foreign business, and the realisation that in many cases the revenues and margins obtainable in home markets – where banks enjoy the benefits of scale and local knowledge – are higher than those that are able to be found abroad.

Since 2008 there has been a gradual withdrawal of global banks from developed and emerging markets. In 2014 Citibank announced that it was withdrawing from 11 markets, including Egypt, the Czech Republic and Japan. The announcement followed similar withdrawals from consumer markets in Pakistan, Uruguay and Spain, and left the bank’s global footprint at 24 countries – half that of 2012. HSBC, meanwhile, has retreated from more than 20 markets since 2011, including Chile, Peru, Colombia, Jordan, Kuwait, Thailand and South Korea.

In 2015 Deutsche Bank announced that it would shed 9000 full-time jobs by 2020 and close operations in 10 countries, including Argentina, Chile, Mexico, Malta and New Zealand. The trend is clear: many of the world’s biggest banks are withdrawing from the advances they made in the 1990s and 2000s in order to focus on their domestic bases, which are largely in the US and Europe.

Regulatory Pressures

The reasons multinational banks give for the closure of overseas businesses generally include improved profitability, income stability, more efficient allocation of capital and political instability. The most frequently cited reason, however, is the important question of regulation.

A 2016 analysis by Spanish banking group BBVA of banks from the US, Canada, the UK, Sweden, Germany, Austria, the Netherlands, France, Italy, Spain and China found that regulation was the key driver in the trend of banks pulling out of certain countries and business lines. Regulatory pressure points include the introduction of stricter capital and liquidity requirements, the ring-fencing of wholesale and investment banking from retail banking, and the different speeds at which countries are implementing banking reforms.

In addition, new reporting standards and a tougher stance on money laundering and illegal activities by the world’s major regulators over the past 10 years have further encouraged geographic contraction. Banks doing business on a global scale have found it difficult to avoid the $800bn-2trn of “dirty money” that the UN estimates is laundered annually, and which has become a matter of interest to law enforcement agencies.

Money laundering and fraud has resulted in banks receiving multibillion-dollar fines from the US Department of Justice, and shareholders have become wary of foreign ventures where proper scrutiny of capital may be more difficult to conduct than domestically. Consequently, the global reach once seen as a fundamental strength of large banking groups is often viewed these days as an increasing liability, with lenders open to regulatory and financial risks as they struggle to manage their geographically dispersed businesses effectively.

New Opportunities

The retrenchment of international banks over the past decade has resulted in opportunities as well as challenges. Regional lenders, which had for decades fought for market space with large global institutions, have welcomed the chance to move into the recently vacated territory.

In some parts of the world this process has been an incremental one, characterised by domestic banks boosting their lending capacity through large bond issuances or initial public offerings, and using their stronger financial bases to move into nearby markets. Capital building has only been part of the story. One of the key differentiators of international players and domestic banks is the comprehensive product array offered by the former. In order to fill the market space left by global banks, domestic players have been compelled to match their former competitors product by product, resulting in regional banks that are capable of performing more functions for a wider array of customers than before.

Latin America

Multinationals such as HSBC, Citigroup and Credit Suisse have sold or reduced their operations in the region since 2013. While some players with strong franchises in the region, such as Santander and BBVA remain, opportunities for regional banks to extend credit across the business spectrum have risen.

Six of the 10 biggest regional banks in 2018 were headquartered in Brazil, and the largest players, such as state-owned Banco do Brasil and private lender Itaú Unibanco, have established a solid continental presence. Itaú’s cross-border acquisitions have set it up to become a truly pan-Latin American institution: in 2014 it merged with the Chilean bank CorpBanca, a move which also saw CorpBanca’s Colombian and Panamanian operations rebranded under the Itaú name.

Colombian banks have sought regional expansion, too, with Bancolombia’s acquisition of El Salvador’s largest bank in 2007 marking the beginning of this process of growth. Colombia’s Grupo Aval, parent company of Banco de Bogota, has also invested heavily in the region, acquiring Banco de América Centra Credomatic’s operations in 2012 and BBVA’s Panama unit the following year. By 2017 Colombian banking groups had controlled 53% of the financial system of El Salvador, 25.5% of Panama’s as well as some 21% of Costa Rica’s.

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