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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 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.
“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:
“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.”
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.
“The impact of regulatory change on operating models may be the biggest driver of top-end M&A as banks realign their portfolios and seek to generate asset sales,” said LOCAL SPOKESPERSON, TITLE, MEMBER FIRM. “Many banks are already studying how to restructure their operating models in order to stay compliant in the new regulatory environment.”
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.
23 interviews were conducted with senior executives at some of the world’s largest banks and at banking associations on the subject of regulation, the growth agenda and challenges in the evolving global banking landscape. Interviews were conducted by KPMG member firms, with the typical interviewee profile being a board member, head of strategy or corporate development, or a senior member of the strategy or corporate development team. Anonymity of interviewees was guaranteed as a condition of participation.
Bruised but not broken: the global banking growth agenda provides high level findings and analysis of the data and can be downloaded at www.kpmg.com.
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Julie WilsonKPMG International
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KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.