Emerging markets respond to retrenchment of overseas banking operations

In the three decades before the 2007-08 global financial crisis, the world’s financial networks became increasingly interconnected. Financial system regulatory convergence and the growing penetration of World Trade Organisation rules, as well as 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. International players such as Citigroup, the Royal Bank of Scotland (RBS), Deutsche Bank, BNP Paribas, Barclays, HSBC, Crédit Agricole, UBS, Bank of America, Société Générale and JPM organ 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, 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 that seen in the early 1990s. By 2016 cross-border capital movement had rebounded to $4.3trn, above the level it was 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 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 revenue and margins obtainable in home markets – where banks enjoy the benefits of scale and local knowledge – are higher than those abroad.

Since 2008 there has also been a gradual withdrawal of banks from both developed and emerging markets. In 2014 Citibank announced that it was pulling out from 11 markets, including Egypt, the Czech Republic and Japan. The announcement followed similar exits 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.

Barclays’ retrenchment in mainland Europe – starting with the sale of its retail banking networks in Spain, Italy and Portugal – spread to Asia, Brazil, Russia and Africa after 2014. The bank’s departure from Egypt in 2016 ended a relationship with the country that stretched back, with only the occasional interruption, to 1864.

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 in the host countries. The most frequently cited reason, however, is the 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 by the world’s major regulators over the past 10 years have further encouraged geographic contraction. Banks 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 around the world, with global banks receiving multibillion-dollar fines from the US Department of Justice.

Correspondent Decline

The withdrawal of global banks from emerging markets is not limited to the closure of head offices and branches. Indeed, there has also been a decline in the number of correspondent relationships between large multinational players and smaller, regional banks – where one lender provides services such as wire transfers and deposit acceptance on behalf of another. Correspondent banking relationships are considered to be important facilitators of the global economic system, and therefore any change in their operation is a matter of concern for regulators.

A 2017 paper published by the IMF found that some emerging economies have been more adversely affected than others by this trend. In Belize, Iran, Liberia and Sudan, for example, there has been a considerable decline in the number of correspondent bank relationships, which has increased financial sector fragility and exposed some lenders to a potential ratings downgrade.

However, in markets such as Kuwait, the Bahamas, Morocco, Saudi Arabia and the UAE, the withdrawal of global banks from correspondent banking relationships has been less marked. In some cases, such as Kuwait, domestic banks acted pre-emptively to reduce the perception of risk associated with their operations, which might have otherwise prompted global banks to cut relations. The challenge of maintaining correspondent banking relations for institutions with smaller capital bases remains a significant one in 2019. “It has definitely been an issue for smaller banks, where carrying out a more thorough risk assessment by foreign correspondent entities is more difficult,” Ronald Harford, chairman of Trinidad and Tobago’s Republic Financial Holdings, told OBG. “In addition, smaller banks usually do not have the capacity to certify that deposits do not have an origin in certain activities, such as gambling.”

New Opportunities

The retrenchment of international banks has resulted in opportunities and challenges. Regional lenders, which had for decades fought for market share against global institutions, welcomed the chance to move into recently vacated territory.

In some parts of the world, this process has been an incremental one, characterised by domestic banks boosting lending capacity through large bond issuances or initial public offerings, and subsequently using their stronger financial bases to move into nearby markets. In other regions, large domestic players have bought significant amounts of foreign assets, quickly establishing themselves as regional giants.

Africa

Regional lenders from Africa’s most vibrant economies, such as Nigeria, Morocco and South Africa, have been quick to capitalise on the space left by departing global players. Nigeria’s biggest lender, GTB ank, first stepped outside the domestic market in 2002, but since 2013 has pursued a more aggressive expansion strategy. Its acquisition of a 70% stake in the Nairobi-based Fina Bank Group gave it an East African foothold, and a strong digital offering has established it as one of the drivers of digital banking in the region.

Moroccan banks, meanwhile, have been competing with global lenders across the continent since the early 2000s, and are now enthusiastically grasping at opportunities presented by the withdrawal of global players. Leading the pack is Attijariwafa Bank, which took over Barclays’ Egypt operation in 2016 and is now present in 16 African markets. In 2018 Moroccan banks had some 50 subsidiaries in 25 African countries, and as income growth has slowed at home, their continental holdings are providing them with vibrant revenue streams. Around 28% of the consolidated net income of Attijariwafa, Banque Centrale Populaire and BMCE Bank of Africa was derived from African subsidiaries in 2017.

GCC

Some Gulf Cooperation Council (GCC) markets have been particularly affected by the retrenchment of global players. Since the 2007 global crisis, for example, the UAE has lost RBS, Lloyds, Barclays and Standard Chartered, though HSBC has strengthened its presence. However, some regional lenders have made their own expansionary moves into economies beyond the region. For example, Qatar National Bank, which until recently was the most formidable lender in the region in terms of Tier-1 capital, opened its first foreign branch in London in 1976, before expanding its presence through subsidiaries or associates to more than 30 countries.

A phase of consolidation is also sweeping the region, creating new lenders with balance sheets capable of financing large projects. Saudi Arabia’s first bank consolidation in two decades saw Saudi British Bank agree to complete a merger with Alawwal in the first half of 2019. With more than 70 listed banks in the GCC’s crowded market, more mergers and acquisitions are expected over the short to medium term.

Latin America

Many multinationals such as HSBC, Citigroup and Crédit Suisse have sold or reduced their operations in Latin America since 2013. While some players with strong franchises in the region, such as Santander and BBVA, remain, opportunities for regional banks have risen. Six of the 10 biggest regional banks in 2018 were based in Brazil, and the largest players, such as state-owned Banco do Brasil and private lender Itaú Unibanco, have established a solid presence across the continent. Colombian banks also expanded regionally, kicked off by Bancolombia’s acquisition of El Salvador’s largest bank in 2007. By 2017 Colombian banks controlled 53% of the financial system of El Salvador, 25.5% of Panama and 21% of Costa Rica.

Asia

Domestic and cross-border loans in Asia ( excluding Japan) have risen from $7.8trn in 2008 to $17.6trn in 2018. Chinese institutions have recorded especially strong growth, expanding their lending portfolios at a compound annual rate of 17% over this period. They have also shown a willingness to take on more credit risk than Western counterparts, offering leveraged loans to private equity firms at up to eight times earnings before interest, tax, depreciation and amortisation (EBITDA), while most US and European banks are limited by credit risk rules to around four times EBITDA. Banks from Taiwan, India, South Korea, Japan and Australia have ramped up regional operations, as have lenders from the smaller markets of Singapore and Malaysia.