Banking in emerging markets
Emerging-market banks have raced ahead despite the financial crisis
as their Western colleagues have languished.
Along the breezy three-kilometre stretch of Mumbai's Marine Drive you
pass cricket pitches, destitute people, luxury hotels, plump joggers and
advertisements for Indian multinational companies, but almost no bank
branches or cash machines.
That absence, suggests O.P. Bhatt, chairman of State Bank of India,
the country's biggest lender, gives the visitor a hint of the potential
for the banking industry.
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Many are finding innovative ways to
offer banking services to poor people without losing money.
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Marine Drive has been underbanked since it was built in the 1930s.
But now there is a palpable sense in India, as in most other emerging
economies, that banking is thriving - just as it has fallen into
disrepute in many Western countries.
The emerging world has a history of volatility and of bad-debt
problems - indeed China is grappling with such a problem at the moment.
But developing-country banks now have got things right on a number of
fronts. Anti-poverty campaigners can admire their efforts to offer
banking services to the illiterate.
Technology gurus can see new mobile applications and low-cost IT
platforms, and industrialists can count on banks that actually want to
lend to their firms.
Regulation buffs see an industry that is both armour-plated and
wrapped in cotton wool after the crises of the late 1990s and early
2000s.
In most emerging economies banks are viewed as engines of development
rather than as rent-seeking parasites.
But it is by the hard stuff, money, that banks in the developing
world now measure up. Not only are they well capitalized and well
funded, they are really big - and are enjoying rapid growth. By profits,
Tier-1 capital, dividends and market value they now account for a
quarter to half of the global banking industry.
China's lenders head the list of banks by market value, and Brazilian
and Russian banks are among the world's top 25. At current growth rates
India's banks will catch up in a decade.
The crisis in Western banking, still reverberating in southern
Europe, seems to have accelerated the shift in banking muscle from rich
countries to the developing world.
This special report will argue that most of that muscle will be
needed at home. To support the fast credit growth their populations and
politicians demand, and the bad debts it may cause, emerging-market
banks will need more capital than they can generate from retained
profits.
They are the pre-eminent gatherers of savings in the world, a mirror
image of Western banks that became huge borrowers.
But they will struggle to use those excess deposits abroad without
taking dangerous currency risks, so the job of recycling excess savings
abroad will remain with central banks and sovereign-wealth funds.
The managers of emerging-market banks have plenty to do as it is.
Some of them already run organisations that are far bigger than the
biggest Western banks.
Most also expect to lose corporate customers to local bond markets
and to have to build up their consumer- and investment-banking
operations to compensate.
Many, too, are finding innovative ways to offer banking services to
poor people without losing money. If the crisis has transformed the
status of emerging-market banks, it has also transformed the role of the
state in banking. In China, which had been relaxing its grip on the
industry for a decade, the government directed the banks to continue
lending during 2008 and 2009 the main reason why the economy continued
to grow fast.
In Brazil, India and Russia the state banks have seen a sharp
improvement in their fortunes, gaining market share at the expense of
private banks.
Some Western banks operating in developing countries have lived up to
their reputation as unreliable partners. That is likely to have
long-term consequences.
The banking system most emerging economies now want is a mix of
entrepreneurial private firms and state banks, with a few well-run
foreign ones to keep the locals honest.
That has big implications for the long list of Western firms
desperate to gain more exposure to emerging economies.
The crisis has underscored the attractions of two business models.
The network banks, such as Citigroup or HSBC, have a presence in lots
of countries to make life easier for their customers.
The "gone native" ones, such as Santander, have big retail operations
with large market shares in just a few countries where they act like,
and by and large are treated as, local firms.
Both these models involve gathering deposits and operating branches
on a large scale. The big investment banks are also active in emerging
economies but may find the going increasingly tough as local banks get
better.
Both those models are almost impossible to replicate now. The network
banks are the products of a century of expansion.
They are sufficiently entrenched for Citigroup's near-collapse in New
York, for instance, to cause minimal damage to its emerging-market
business.
The "gone native" banks seized unique opportunities in the 1990s and
early 2000s as Latin America sold off banks after bad-debt crises and
eastern Europe privatized after communism's fall.
No such sell-off looks remotely likely soon in China, India or
Russia.
Even the traditional last-resort technique for banks that want to
become more international setting up a few branches overseas and
borrowing from headquarters or wholesale markets to fund lending there -
has become much harder as regulators are clamping down on it.
The difficulty is mutual
The only consolation for Western firms that cannot get in is that
emerging-market banks are facing exactly the same set of problems as
they try to expand abroad. For them the crisis came too soon.
With another decade under their belt they might have had the size,
excess capital and skills to seize the moment and buy big bombed-out
banks at the peak of the crisis.
As it is, most are having to embrace gradualist strategies. All are
building "strings of pearls" branches in big partner countries to help
service customers at home. Some are also offering banking services to
diaspora populations in rich countries.
The Western banks have found that establishing a light presence in
lots of countries is a great way to lose money. The same is likely to be
true for emerging-market banks, so the smarter firms are trying to
develop a competitive advantage that they can export.
For the Indians that may be low-cost technology; for the Brazilians,
investment-banking savvy.
Some of the biggest emerging-market banks are experimenting with
small acquisitions in their "near abroad". Going global requires the
successful integration of lots of acquisitions, which Western banks have
found hard to do.
This special report will show that the globalization of banking,
which has driven the industry for two decades, is in many ways on hold.
If emerging economies are much more sceptical about unfettered
finance and the role of foreign banks, Western societies are much more
hostile to banks in general, let alone those run by foreigners or, worse
still, foreign governments.
Although emerging-market banks have far healthier business models
than Western firms do, many of them will face a difficult trade-off.
They will need access to foreign countries in order to build the sort
of large-scale operations that make money.
To get it, they may have to show that they are at arm's length, or
even entirely detached, from their governments.
Yet the crisis has pushed most banks in the developing world the
other way.
These banks have been pitched into the big league rather suddenly,
helped by the woes of Western banks and the continued strong growth in
their own economies.
It seems inevitable that Mumbai's Marine Drive will soon be decked
with ATM machines, its joggers will be stabbing mobile-banking screens,
the firms on the billboards will be going on buying sprees overseas and
even the destitute will have some access to finance.
Whether emerging-market banks will soon punch their weight in global
banking, let alone dominate it, is another question.
- The Economist print edition
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