Financial Services

INTERNATIONAL BANKING STRATEGY

THE QUEST FOR EL DORADO?
AUTHORS
Alan McIntyre
Chaitra Chandrasekhar
TABLE OF CONTENTS
EXECUTIVE SUMMARY 4
THE NEED FOR AN INTERNATIONAL STRATEGY 6
THE EXPLORERS MAP 12
THE INSTITUTIONAL LENS 22
CHARTING A COURSE 28
CONCLUDING THOUGHTS 34
You could be forgiven for thinking that the
story of international banking over the last
five years has simply been one of retreat,
retrenchment and penance. The challenges
posed by the aftermath of the global financial
crisis have certainly caused many banks
to pull back and limit their international
ambitions. Some have needed to shore up
their capital positions; others have disposed of
international assets as a condition of state aid;
while others have retreated from international
businesses simply because they see a rising
regulatory burden, increasing complexity, and
unattractive operating economics. Whatever
the motivation, the result has been a clear
trend towards the re-localization of banking
and many management teams who have
been focused on returning core domestic
franchises to profitability.
Although this headline story is undoubtedly
true, it also conceals a more nuanced and
interesting sub-text in which a more positive
view of international expansion is evident.
While many of the pre-crisis global banking
powerhouses have been putting their houses
in order, there has been a group of large
financial institutions (mostly outside the US
and Western Europe) that have actually done
very well over the last three to four years
and are now acting from positions of relative
strength. They recognize that this position
of relative strength may not last, so they are
now starting to re-evaluate and rethink their
international strategies.
There are also many banks, even within
Europe and the US, who - although wounded
by the financial crisis - now find themselves
on more solid ground and are facing the
challenge of where earnings growth will
come from over the next decade. From large
multi-local institutions looking to optimize
their international footprint, through global
product specialists, to smaller domestic
players looking to benefit from their clients
overseas expansion, our observation is that
international strategy is now back on the
agenda in many bank boardrooms.
Compared to the last major expansion in
international banking a decade ago, the
players today face a changed landscape
and are caught between two macro trends
pulling in opposite directions. On one
hand, many of what were once emerging
markets in the Middle East, Latin America
and Asia have now matured into material
profit pools with medium-term growth
rates that far outstrip those anticipated
in Europe and North America. But on the
other hand, enthusiasm about market
fundamentals now needs to be tempered
by a regulatory environment that is driving
increased localization, higher operating
costs and prohibitive barriers to entry in
many of the most attractive markets. So
just as international expansion becomes
more attractive on a pure economic basis,
the degree of difficulty and inherent risk in
executing such a strategy is beginning to
look prohibitive to many bank Boards.
EXECUTIVE SUMMARY
4 Copyright 2013 Oliver Wyman
With this as the market backdrop, this report
attempts to do three things:
Provide an objective view of where the
attractive market opportunities may be
for internationally ambitious banks. In
assessing attractiveness, we consider
not only the economic fundamentals
of a market, but also the structural
considerations that play a critical role in
evaluating whether a particular geography
or segment represents a good risk-
adjusted opportunity for an outside entrant
Given this opportunity set, we outline
why each bank needs to develop its own
personalized lens that allows it to assess
opportunities in light of its institution-
specific capabilities and constraints
Finally, from an Executive Management
and Board perspective, we describe a
framework for defining an international
strategy that effectively leverages
differentiated capabilities whilst both
respecting and managing the constraints
that exist in the post-financial-crisis world
These are interesting times for the global
banking industry. Many players are content
to hunker down and focus on optimizing and
rebuilding profitability within their current
business model and geographic footprint.
However, we also think that - despite the
obvious challenges - this could be a period of
opportunity for those with both the financial
resources and the clarity of thought to take
some risks and go exploring.
There are interesting parallels to be drawn
between the banks of today and the European
explorers of the Golden Age of Discovery five
hundred years ago (and we attempt to draw
out those parallels in the remainder of this
document through an extended sidebar to
the main text). Constrained by poor domestic
market conditions, but unwilling to accept a
low-growth scenario, the great explorers went
looking for growth, profits and expansion
opportunities by pointing their ships over
the horizon. Some of those adventures paid
off handsomely and were the basis of trading
empires that lasted hundreds of years. Others
discovered to their cost that there were dangers
and challenges associated with international
expansion that required very specific skills and
a disciplined mind-set to overcome. And some
- even though they were experienced and well
prepared - found that the El Dorados they
were seeking turned out to be nothing more
than myths and legends.
In the world of international banking,
the winners over the next decade will
be those institutions who have a clear-
sighted view of the opportunities in front
of them and can separate fact from fiction.
They will also be the institutions capable
of tailoring their international strategy to
their unique capabilities while recognizing
and respecting their own limitations and
constraints. Not all will succeed, but those
who do may look back on this period of
post-crisis realignment in the global banking
industry as indeed an age of opportunity.
THE NEED FOR AN
INTERNATIONAL
STRATEGY
1
THE NEED FOR AN
INTERNATIONAL
STRATEGY
Drawing a parallel to the Age of Discovery in the 15th to 17th centuries,
many banks today are evaluating foreign markets, figuring out how they
should navigate the world, where (if at all) they should lay anchor and
what they should build there.
A key driver of the Age of Discovery was the 15th Century version of a
regulatory intervention. The demise of the Byzantine Empire culminating
in the fall of Constantinople to the Ottomans in 1453 denied Western
Europeans easy access to the lucrative overland trade routes to Asia,
and the Silk Road which Marco Polo had travelled in the 13th century
was effectively closed to them. Faced with stagnant domestic markets,
yet fully aware of the promise of riches to the East, Europeans embarked
on explorations by sea in the hope of establishing new trade routes for
spices and precious metals.
Explorers viewed this opportunity in different ways some looked at
foreign lands simply as mutually beneficial trading partners, while
others had more ambitious plans that went beyond trading to staking
ownership rights to land and natural resources. In both scenarios, the
true value lay in being able to sustain an economic relationship over the
long term. While the Vikings may have indeed reached the Americas well
before any other Europeans, their inability to replicate their journeys
and establish permanent settlements consigned their adventures to a
historical footnote when compared to the Spanish explorers of the 15th
and 16th centuries.
One quest that captivated generations of European explorers was the
search for the legendary golden city of El Dorado. The name is probably
derived from Muisca chiefs who were reputed to have covered themselves
in gold dust before jumping into Lake Guatavita to appease an underwater
god. Over time, rumors of a city of gold lured many treasure hunters
including Sir Walter Raleigh. Numerous Spanish explorers also scoured the
region, but no evidence of the city of gold was ever found. However, the
legend did attract many capable explorers who went on to settle in South
America with more modest and realistic ambitions. As Edgar Allan Poe wrote
in 1849, the quest for El Dorado was above all an invitation to adventure.
Over the Mountains of the Moon, down the Valleys of the Shadow, ride,
boldly rideif you seek for El Dorado.
Edgar Allan Poe, Eldorado, The Works of the Late Edgar Allan Poe (1850)
THE NEED FOR AN
INTERNATIONAL
STRATEGY
7
THE NEED FOR AN
INTERNATIONAL
STRATEGY
Given the trauma of the global financial crisis,
the ongoing uncertainty around the future
of the Euro, and sundry other challenges
from mortgage foreclosures to money
laundering, it is hardly surprising that most
global financial institutions have spent the
last five years looking inward. The result has
been the forced or voluntary disposal of many
foreign assets, the increased localization
of many large banks, and a general
retrenchment of the global banking industry.
In some cases, the principal driver has been
regulatory pressure around capital adequacy
and liquidity. But in many other cases
retrenchment has simply been a response to
low returns and the conclusion that marginal
businesses in poorly understood emerging
markets are a management distraction and a
source of disproportionate operational risk.
In the United States, the Dodd-Frank act
represents a far-reaching policy shift in regulation,
with the Tarullo FBO
1
rule, in particular, having
major implications for large foreign banks
operating in the US. Meanwhile in the UK,
the Independent Commission on Banking
(Vickers) report proposed the ring-fencing of
retail activities and a definitive move away from
the Universal Banking model. While unlikely to
be implemented in its original form, the Liikanen
Report also suggests that similar ring-fencing
could be in the cards for the rest of the EU.
These market and regulatory forces have
created an environment that has been
increasingly inhospitable to internationally
active banks. The result, as shown in Exhibit 1,
has been a five year period during which bank
1 Foreign Banking Organizations
EXHIBIT 1: SHARE OF FOREIGN-OWNED ASSETS GLOBALLY AND SELECTED INTERNATIONAL RETRENCHMENTS
14
12
10
16
PERCENTAGE OF FOREIGN BANK ASSETS AMONG TOTAL BANK ASSETS
%
2004 2005 2006 2007 2008 2009 2010 2011 2013e 2012e
Retrenchment Expansion
Citi divests several businesses in Japan for $7.8 BN
HSBC sells French mutual fund operations
SocGen sells asset management subsidiary in London (AUM $8.2 BN)
Citi sells part of consumer loan portfolio in Europe and Canadian
MasterCard business, a $2.1 BN credit-card portfolio
WestLB sells French private bank
SEB sells German retail banking business for 555 MM
BNP Paribas sells Cayman and Panama WM
Citi sells Egg UK credit card business (1.8 BN gross assets) and
divests Citibank Belgium
HSBC sells US card business to Capital One for $2.6 BN and 195
branches in NY for $1BN
RBS sells 1.8 BN Spanish real-estate portfolio
Dexia sells Luxembourg subsidiary for 730 MM
ING sells ING Direct USA for $9 BN to Capital One
HSBC exits 8 Latin American countries and scales back/exits in
6 Eastern European markets
SocGen sells stake in US and Canadian investment/wealth
management rms and Greek, Egyptian and
Indian subsidiaries
RBS scales back capital markets activity in 4 Asian countries and
sells private banking business in Latin America and Africa
(total AUM $2 BN+)
Dexia sells DenizBank in Turkey for $3.5 BN
ING sells ING Bank of Canada (ING Direct) for $3.1 BN
Citi announces scale back of operations in 21 countries
HSBC sells US personal unsecured and homeowner loan portfolios
for $3.2 BN
RBS may sell Citizens in US and is scaling back operations in India
1
2
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4
5
1
2
3
4 5
Source: IMF, Dealogic, SNL, Oliver Wyman analysis
8 Copyright 2013 Oliver Wyman
EXHIBIT 2: COMPARISON OF TOP 10 BANKS RETURN ON EQUITY (ROE) ACROSS
KEY MARKETS
15
20
5
10
25
0
TOP10 BANK RETURN ON EQUITY
ROE %
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Pre-crisis ROE
Post-crisis ROE
Global average
(post-crisis)
Global average
(pre-crisis)
Change in ROE
(pre to post crisis)
Source: IMF, Thomson Reuters Datastream, Oliver Wyman analysis
assets have re-localized to a level last seen in
the early part of the last decade.
But this big picture masks a more nuanced
and interesting story. As Exhibit 2 shows, in
profitability terms the brunt of the global
financial crisis was born by US and European
institutions. While returns have bounced
back from the lows of 2009, banks in these
geographies continue to struggle to return
their cost of capital to shareholders and also
face persistent litigation and liability issues.
But if you look beyond the US and Europe, in
many markets you find a markedly different
picture. In these markets, post-crisis returns
are still attractive (and actually above
average global pre-crisis levels) and in some
markets the profitability of the banking
industry has actually risen post-crisis.
In relative competitive terms, many of the
major banks in these markets are leaving the
crisis stronger than when they went in, and
some have moved from being local leaders
to being true international institutions with
global ambitions. While there is no single
reason for their success, these institutions
tend to be characterized by a relatively stable
and healthy macro-economic environment in
their home markets. These home markets are
also often stable competitive environments
that, in a number of cases, border on being
strong oligopolies. Finally, conservative
and sometimes intrusive home market
regulation coupled with robust internal risk
management often limited the amount of
risk that these banks took pre-crisis.
9
Looking forward in Exhibit 3, the relative
valuations of major banks also show this
bifurcation between an industry in the US and
Western Europe still struggling to come to
terms with the post-crisis world, and markets
where there is more confidence in the ability
of financial institutions to deliver attractive
future returns to shareholders.
This performance gap and the procession
of asset disposals by the US and Western
European players most badly-hit by the crisis
has already created some unique opportunities
for banks with international ambitions.
Santander has made a number of acquisitions,
including Sovereign Bank and the auto loan
portfolios of Citi and HSBC in the US, SEBs retail
banking business in Germany and two banks
in Poland. Canadian banks have also been
acquirers, as evidenced by TDs US acquisitions
of Commerce Bank and Chrysler Financial Corp,
Bank of Montreals US acquisition of Marshall
& Ilsley, and Scotiabanks serial acquisitions
in Latin America, the Caribbean and Asia.
Other recent and notable international
expansions include Sberbanks foray into
eight CEE countries, Banco Itaus nascent
growth efforts in Peru, Colombia and Chile,
CIMBs acquisition of most of RBSs investment
banking operations in Asia, and Mitsubishi
UFJs expansion in the US with the acquisition
of Pacific Capital Bancorp and the addition of
several project finance books. Recent asset
sales in attractive markets like Turkey have also
drawn bids from multiple banks, for example,
Sberbank, Commercial Bank of Qatar, and
Burgan Bank have all made Turkish acquisitions.
However, it isnt all good news for the winners.
Some of the factors that were the foundation
of their recent outperformance now present
a challenge for future growth. Many of the
most successful post-crisis banks, such as the
Canadian, Australian and Brazilian market
leaders, are now facing economic, regulatory
or competitive constraints which limit their
growth at home. At the same time, global
regulatory changes are signaling increasing
protectionism on both the retail and wholesale
sides of the business. Regulations such as
Vickers in the UK and Dodd-Frank in the US
will result in more domestic capital markets
businesses, limiting cross-border and
international activity. As recent significant
fines for money-laundering indicate, there is
also a high cost associated with arms-length
international banking relationships. Merely
dipping a toe in international banking waters
has become an increasingly dangerous activity.
So many of the most successful global banks
of the last five years now face a quandary.
They are often operating in either low-growth
and or highly concentrated domestic markets
and the medium-term economic returns
from these markets are unlikely to satisfy their
shareholders. Because of their past success,
they now have the financial strength to enable
them to look internationally for opportunities.
Yet the regulatory tide is clearly moving
against them, making it harder to pick off
niche international opportunities and take a
low-risk approach to foreign expansion. The
result is a renewed interest in international
portfolio strategy to both boost and
diversify earnings.
Broadly speaking, the banks we work with are
considering two approaches to international
expansion. The first is essentially flag planting.
In this approach, foreign banks satisfy
regulatory demands for localization by building
or acquiring full-service operations that look
and act like domestic institutions. The glocals
or multi-locals we have studied who follow
this approach hope to benefit from strong
market fundamentals by being a domestic
institution in many different markets.
The second approach is a trader or enabler
strategy. This model involves limited on-
the-ground presence in foreign markets
and instead develops the products and
capabilities necessary to serve an increasingly
international customer base. The target client
base includes both domestic clients (consumer
10 Copyright 2013 Oliver Wyman
and commercial) conducting international
transactions, but also foreign clients establishing
themselves in the domestic market of the
bank through FDI flows, trade or migration.
Of course, these two approaches are not
mutually exclusive. Both HSBC and Citi have
shown that it is possible to have both multi-
domestic local franchises while also pursuing
a broader enablement strategy predicated on
trade flows and cross-border payments. But for
the purposes of this paper, we see these two
models as useful archetypes of an international
banking strategy. It is also not uncommon for
trader strategies to morph into a stronger
on-the-ground business as clients demand
more domestic cash management and
wealth management services in addition to
trade-oriented products.
An exception to these models are the large
global wholesale banks who generally
operate as consolidated capital markets
players from a small number of international
hubs. We have separately addressed the
specific challenges faced by these already
highly international players in our annual
report on the outlook for wholesale banking
2
.
In this report we outline a disciplined approach
for banks evaluating their international
strategy, whether they favor a multi-
domestic approach, a trader model, or
a combination of the two. In Chapter
2, we provide an overview of market
fundamentals, highlighting attractive
opportunities for banks from an outside-
in perspective. In Chapter 3, we focus on
understanding the bank- specific overlay or
lens that individual institutions need to
use when evaluating these opportunities.
In Chapter 4, we provide an illustration of
a structured approach or playbook for
formulating an international strategy and
walk through some examples. In Chapter
5, we summarize key considerations and
suggest some next steps for banks with the
appetite to go exploring.
2 Oliver Wyman-Morgan Stanley report Outlook for Wholesale
and Investment Banking 2013, April 2013 for more detail
EXHIBIT 3: COMPARISON OF TOP BANK PRICE TO BOOK RATIOS (P/B) ACROSS KEY MARKETS
3
4
1
2
5
0
PRICETOBOOK RATIO
66 percentile
price-to-book
33 percentile
price-to-book
Price-to-book
of top banks
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Note: Price-to-book data for 2012. Percentile price-to-book lines indicate that one third of top 10 banks in the target countries
shown had price-to-book ratios higher or lower than the 66 percentile or 33 percentile price-to-book ratio respectively
Source: Thomson Reuters Datastream, Capital IQ, company reports, Oliver Wyman analysis
11
THE EXPLORERS MAP
2
THE EXPLORERS MAP
While some explorers like Magellan and Columbus just headed off on
a compass bearing with the hope of reaching their destination, most
explorers benefit from a good map to guide their journey. The map provides
an objective description of the current state of the world: Where are the
largest treasures? How difficult is it to get there? Once you get there, how
do you access the bounty? Are the locals going to be friendly or hostile?
What strategies and technical capabilities will you need to succeed?
As ships became increasingly seaworthy and the science of navigation
advanced, cartographers came into their own. No longer was it enough
to signal there be dragons at the edges of a crude local map. The
increasing demand for exotic products and precious metals demanded
a more disciplined approach that could identify potentially lucrative
locations and the best trade routes to get there (and get back).
A successful international strategy starts with a good understanding of
the global banking landscape. Where are the attractive markets now
and in the future? How are those markets connected to each other?
Where is the potential return worth the financial and reputational risk?
As many investors in Chinese banking over the last decade have
discovered to their cost, market attractiveness is not just an issue
of revenue potential and profit pools. Instead, outsiders should
evaluate market attractiveness along two dimensions economic
and structural. Economic fundamentals include size, expected
growth and current and future profitability. Structural factors
determine international players ability to access this raw economic
opportunity and include considerations such as customer buying
patterns, entry barriers, regulatory environment and competitive
structure, as well as broader geopolitical stability issues.
13
Exhibit 4 shows the factors we have used
to construct indices of economic and
structural attractiveness for the major
global banking markets.
For institutions taking a multi-domestic
approach (i.e. banks who aspire to play on-
the-ground in multiple markets), economic
and structural analysis can help you build
a comprehensive market map as shown in
Exhibit 5.
This type of analysis provides a consistent
view of global banking opportunities from
the perspective of an outsider looking in;
recognizing that domestic players may have
a very different perspective, particularly on
the structural dimension.
Sub-segments within these markets, such
as wholesale or high-net-worth, require
another deeper level of analysis. But at the
macro-level, this type of map begins to
segment the market opportunities. Some
conclusions are unsurprising. For example,
EXHIBIT 4: ECONOMIC AND STRUCTURAL INDEX FACTORS
ECONOMIC INDEX
Factor Description Key determinants
Market potential Market size of the banking sectors as
measured by banking revenue pools in
each market
Future growth of the banking sector in
each market based on the underlying
economy, market demographics,
expected wealth creation, state of the
banking sector and overall financial
market development
Provides a view of the size of the
opportunity in the short and long-term
2011 revenues
Expected 10 year CAGR
Profitability Expected returns these must be
reviewed by segment as profitability
varies considerably by product, segment
and model in most markets
Sustainability of returns over the mid-
to long-term
ROE
Margin expansion/compression trends
STRUCTURAL INDEX
Factor Description Key determinants
Market concentration Structure of the banking industry
in terms of level of concentration or
fragmentation of the market
Competitive considerations affecting
new entrants ability to succeed
Top 5 bank/top 10 bank market shares
HHI index
Regulation & openness
of market
Local regulatory environment may
limit or encourage foreign entry
and participation
Certainty or lack thereof of the regulatory
environment also affects attractiveness
of markets
Quantitative scores based on financial
sector regulation
Foreign bank participation levels
Geo-
political environment
Institutional frameworks and the rule
of law affect attractiveness from a
structural perspective
Some markets, particularly those with
higher returns, may be plagued by higher
volatility which affects attractiveness
of markets
Quantitative scores based on rule of law
and business regulation
14 Copyright 2013 Oliver Wyman
many European markets are unattractive
as a result of poor economic fundamentals
and some are further hindered by the
lack of opportunities for entry by foreign
banks. Other markets where the economic
fundamentals are undoubtedly strong
such as India and China continue to be
difficult places for foreign banks to make
profits or build a meaningful franchise. But
the good news is that there are markets
where economic and structural factors
combine to create attractive opportunities
for foreign institutions.
Some of these attractive markets, such
as Mexico or Poland, fit well with
conventional wisdom.
But others, such as the US and UK, may be
more counter-intuitive given recent history.
In the US, the green shoots of a real economic
recovery are now becoming apparent and
the sheer size of the market makes it worthy
of consideration on the economic dimension.
However, the more interesting perspective
is that despite its reputation as a litigious
market with complex and overlapping
regulatory agencies, the US is structurally
very attractive to foreign entrants. The
key drivers of this attractiveness include
its market fragmentation, minimal
restrictions on foreign ownership, history of
technological innovations and the plethora
of specialist business models, all of which
create multiple entry options. Given the
current status of the US dollar as the worlds
reserve currency (and the dominant currency
for international trade) there are also unique
benefits to USD funding that should also be
taken into consideration.
EXHIBIT 5: THE EXPLORERS MAP
Medium potential markets due to significant structural
issues such as entry barriers, unequal playing field
High potential markets with attractive financial sector
economics and favorable market structure dynamics
such as ease of entry, fragmentation
Low potential markets with poor financial sector dynamics
as well as limited structural advantage for foreign banks
Medium-low potential markets with moderately
free market structures but limited financial
returns primarily due to economic stagnation
FAVORABLE UNFAVORABLE
ECONOMIC INDEX
HIGH
LOW
United States
Canada
Mexico
Brazil
Colombia
Peru
United Kingdom
France
Germany
Spain
Italy
Russia
Poland
Switzerland
Scandinavia
China
India
Japan
Korea
Indonesia
Malaysia
Thailand
Singapore
Hong Kong
Australia
Taiwan
Turkey
GCC
South Africa
2011 Total
revenue
STRUCTURAL INDEX
Note: GCC refers to the Gulf Cooperation Council and includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the
United Arab Emirates
15
We also think the UK is potentially attractive, although
for different reasons. While the macroeconomic
fundamentals are potentially as challenging as the rest of
Western Europe, the UK is unusual in being a market in
competitive transition. Having been a pre-crisis oligopoly,
forced asset disposals, government encouragement of
new entrants (including the promise of lower capital
requirements) and public antipathy towards established
players have created a potential window of opportunity
to reshape the traditional branch-based retail banking
sector. We also believe that, despite increasing conduct
and product regulation, the core economics of UK retail
banking are likely to remain amongst the most attractive in
Europe; a fact that has been largely obscured by the furor
around past mis-selling issues and the well documented
problems of the UK banks wholesale operations
3
.
3 Refer to Oliver Wyman report Perspectives on the UK Retail Banking Market,
November 2012 for more detail
DISAGGREGATING THE
ECONOMIC DIMENSION
In the 21st century, China is still an emerging economy, but
the situation was quite different in the 16th century when the
idea of the middle kingdom placed China at the heart of
pan-Asian trade routes. With a large population and a trading
infrastructure that could handle everything from silks to spices
to precious metals to fine art, China enjoyed high growth rates
and had the necessary surplus wealth to manufacture luxury
goods. High margin items such as spices and fine chinaware
attracted the attention of the Portuguese, Dutch, Spanish and
English who established permanent settlements with the hope
of becoming trading partners with China. However, the 1000%
margin on certain spices also made it worth taking the risk of
bypassing the land-based trade routes that crisscrossed China
and instead take to the seas to go directly to the Spice Islands.
EXHIBIT 6: EXPECTED BANKING REVENUES IN MAJOR MARKETS AT THE END OF THE DECADE
Americas Europe Middle East
and Africa
Asia and Oceania
Revenue in 2020
% of world
revenue
(estimated)
38% 4% 28% 30%
Source: Oliver Wyman analysis
16 Copyright 2013 Oliver Wyman
Looking top down, even though some emerging markets
such as China and Brazil now have sizeable domestic
banking sectors, developed markets continue to dominate,
accounting for 70% of current global banking revenues.
Over the next ten years, banking in emerging markets
is expected to grow three times as fast as in developed
markets, resulting in the emerging markets accounting
for nearly half of global banking revenues in 2020.
At the regional level, Asia continues to outgrow other
regions and is expected to account for half of all
global deposits by the end of this decade. This growth is
underpinned by faster economic growth and increased
buying power, demographic dividends in many markets,
and the presumed continued liberalization of critical
markets such as China and India. The Reserve Bank
of Indias upcoming grant of a limited number of new
banking licenses is expected to be 10 times over-
subscribed, underscoring the fundamental economic
attractiveness of these types of markets.
But for shareholders, revenue - while indicative of overall
opportunity - is clearly less important than profits. Retail
banking profits are highly dependent on asset margins,
which are in turn dictated by interest rates (both the
level and shape of the yield curve). Emerging markets
exhibit higher profitability today, partly because of high
interest rates associated either with the underlying
economic conditions (as in Brazil and Indonesia) or
with government regulations that result in managed
interest rate regimes (as in China where the central
bank sets floors on lending rates and ceilings on deposit
rates). Over time, we expect asset margins in emerging
markets to decrease as competition intensifies and the
underlying economies develop and mature.
In contrast, current low margins in developed markets
are partly driven by post-crisis interest rates which
remain stubbornly close to zero. Although historically
low rates are likely to be sustained for several years to
come, rate spreads are expected to rise as the underlying
economies recover, which in turn should widen
spreads and close the relative profitability gap between
developed and developing markets.
UNPACKING THE STRUCTURAL
CONSIDERATIONS
Market concentration has historically been a good defense
against foreign commercial threats. Chinas 16th Century
economy was heavily centralized and regulated and hence
difficult for foreign traders to penetrate. In contrast, the
native North Americans seem to have had weak trade
networks between tribes and this fragmentation made
it relatively easy for Europeans to dominate commercial
activity and eventually dominate the continent.
Restrictions on foreign players entering developing markets
are not new. The economic doctrine of mercantilism
dominated Western Europe in the sixteenth century with
high tariffs being used to protect trade-flows between
foreign colonies and domestic markets. This bonded
the colonies to the home country and also protected the
home countries merchant class from developed world
competition. The inability of many European countries such
as the Netherlands and Germany to access the markets
of the Americas ultimately led them to develop their own
trading empires in less attractive geographies like the South
Seas and Africa. Despite its dominant trading position, it
can be said the inability of the UK to establish an equitable
sharing of the spoils with its American colonies ultimately
lead to the American Revolution.
Our structural index measures industry-specific dynamics
that affect the entry and performance of foreign institutions
in a given banking market. Though most markets have
tended towards liberalization over the last 20 years, many
markets remain hard to access and even harder to make a
good profit in. The barriers to entry may be regulatory,
as in the case of China and India, or due to the competitive
structure of the industry, as in the case of Canada and
Japan. There can also be hurdles with respect to customer
buying behavior, for example the tight interlinkages in
Germany between the industrial and banking sectors.
While well-functioning oligopolies in general pose serious
challenges for new market entrants, uncertain or changing
market dynamics may open up new opportunities, such as in
the UK retail sector. Large scale government participation in
the financial sector may also distort industry economics (for
example politically motivated credit decisions in China) and
create an unequal playing field which deters foreign entrants.
17
Regulatory restrictions on foreign ownership,
licensing and market participation present
major barriers that can be difficult to circumvent.
For example, foreign participation in the
Chinese market remains low due to regulatory
restrictions (although that hasnt stopped
many Western institutions from making
sizeable equity investments in Chinese banks).
Regulation can also impose requirements that
dampen economic attractiveness either in home
markets or target foreign markets. Most of the
emerging regulations, such as Basel III or Dodd-
Frank, are moving in this direction and in some
emerging markets interest rates and capital
restrictions can directly impact the outside-
in economics of the banking business.
Broader market stability concerns also need
to be considered. In developed markets the
level of central bank intervention and the long-
term interplay between fiscal and monetary
policy remains uncertain. Despite the certainty
that interest rates will eventually rise, the
timing remains uncertain and any strategy
predicated on rising rates could have material
short-term downside. While emerging
markets have increasingly implemented
sound economic policies and built stronger
institutions to reduce volatility, many of these
measures focus on taxes and limits on foreign
investment flows, which again potentially limit
the attractiveness of foreign bank expansion.
The final structural factor is around the
broader market framework primarily the
rule of law and market infrastructure. The
data clearly indicates that markets with
a weak rule of law and poorly defined or
enforced property rights struggle to develop
a market for long-term credit products
such as mortgages. But probably more
important for potential foreign entrants are
corruption, money laundering and other
dubious activities, which may pose serious
reputational or regulatory risks.
TRADING NOT COLONIZING
Many empires like that of the Spanish in the
Americas were built on conquest, but some of
classical historys most successful commercial
empires were built on the idea of free trade.
The Phoenicians dealt in commodities such as
wood, glass and Tyrian purple dyes, but they
actively avoided hostilities with their commercial
partners. Instead they focused on wealth
creation by dominating the southern shore of
the Mediterranean and coexisting with the
Greeks who focused on the northern shore.
Although the Phoenician trade infrastructure
was initially based on a scarce specialized
product (the Tyrian dye), over time they added
precious metals and other goods to their
distribution network. As merchants, they
deployed diplomacy rather than firepower to
expand their reach. They also recognized the
value of technology in protecting and increasing
the productivity of their trading routes with
innovations (mostly borrowed from other
cultures like the Egyptians) such as mechanical
clocks, harbor cranes, the dry compass and
stern-mounted rudders all playing a role in
keeping them ahead of the competition.
All banks, and especially those that are
inclined to adopt a trader rather than a
multi-domestic international strategy, will
benefit from understanding bilateral trade
and investment flows both their direction
and their size. Corporate clients today have
increasingly international needs driven by a
more global customer and supplier base and
increasingly international supply chains. In
some geographies and customer segments,
enabling international transactions has
become table stakes. We identify three
broad areas of opportunity for the traders:
enabling trade flows around the supply
chain, financing longer-term foreign direct
investment flows and facilitating remittances
and individual wealth flows.
18 Copyright 2013 Oliver Wyman
Despite international retail remittances now
amounting to half a trillion dollars a year, the
bulk of international financial flows involve
business-to-business transactions. On the
commercial side, there are two types of
opportunities; providing international banking
services to domestic clients, or providing
domestic banking services to foreign or
multi-national clients who are active in your
home geography. Compared to these flows,
international retail flows (investments and
remittances) remain a niche opportunity
accounting for less than 5% of the total.
Bilateral flows outside developed markets
have been increasing with globalization
as seen in Exhibit 7. The size and direction
of flows are also seeing major shifts. For
example, foreign investment in the US
dwarfed US investment abroad by the biggest
margin on record for much of last year. The
$4.7 trillion
4
gap in the second and third
quarters of 2012 is the biggest since tracking
began in 1976. On the global stage, FDI flows
to emerging and developing economies
exceeded those to developed economies for
the first time in 2012. Not surprisingly, given
economic fundamentals, Asia will continue
to increase its proportion of international
trade and is expected to surpass Europe to
become the crossroad of global trade by 2020
4 As reported by the Commerce department, Americas
international investment position calculates how much the value
of foreign investments in the U.S. exceeded its investments abroad
EXHIBIT 7: TRADE AND FDI GROWTH (2009-2011)
GROWTH IN TRADE VOLUMES 20092011
10%
GROWTH IN FDI POSITION
20092011
20%
0%
4%
8%
12%
16%
20% 30% 40%
North-APAC
Global avg
trade growth=20%
Global avg FDI
growth=8%
South-APAC
APAC-North
South-North
APAC-South
North-South
South-South
>50%
25%50%
10%25%
5%10%
<5%

~ 300 $BN
2011 trade volume
North-North
APAC-APAC
% of global
FDI stock:
Note: North includes Western Europe, the US and Canada; APAC includes Japan, East Asia, South Asia, South East Asia, and Oceania; South includes the rest of the world
Source: IMF, UNCTAD, Oliver Wyman analysis
19
in a reprise of its position centuries ago. An
estimated 60% of trade flows will have Asian
involvement when compared to Europes
40% by the end of this decade, so any trader
strategy without a strong Asian presence is
unlikely to be a good long-term bet.
Given that customers are increasingly pursuing
business abroad or sourcing product from
overseas, banks have an opportunity to
expand alongside their clients by providing
financing, transaction banking, and wealth
management services, ideally capturing
both ends of the transaction. There is also
increased demand from smaller businesses
for international products and services as the
internet-enabled world is allowing even small
businesses to develop both foreign suppliers
and customers. As a result, an increasing
number of domestic players worldwide are
developing a suite of international banking
products. The challenge is to develop cost-
effective options to serve smaller clients;
hence the white labeling of FX and trade-
finance products to primarily domestic
banks is a growth area. The success of
this type of strategy may also be limited
over time by the lack of domestic cash
management and payments infrastructure
and hence it may be natural for a trader
strategy to evolve into a multi-local model or
a formal alliance structure with a local bank
in order to effectively serve customers.
Moving beyond single customer
enablement, there are also opportunities
along the full supply chain where a single
institution takes an end-to-end view that
spans multiple customers. A number of Asian
banks are moving vertically along the supply
chain to provide this type of financing for
import and export partners and are seeking
to dominate certain bilateral trade routes in
specific industry segments.
While long term FDI is still dominated by flows
within the developed world, the projected
need is primarily in high-growth emerging
markets. For internationally ambitious
banks there are opportunities to provide
services at both ends of these investment
flows. Many specialist infrastructure
players are expanding internationally to
provide opportunities for their customers
to invest in markets with growing private
and public construction industries. There is
also a trend for long-term developed world
investors such as pension funds to make
direct real asset investments in emerging
markets, forcing the banks to move from
being a funding intermediary into an
advisory and facilitation role that is more
fee income than balance sheet-oriented.
Clearly, if you are a trader, analyzing these
types of flows is a vital step in developing an
international strategy. Grouping countries
based on inter-connectivity can also facilitate
better cross-border coverage and execution.
There may also be opportunities to enhance
the scale of business across smaller
markets with centralized operations and
management, for example, taking advantage
of Middle Eastern free trade zones to create
regional trading hubs.
20 Copyright 2013 Oliver Wyman
21
THE INSTITUTIONAL LENS
3
THE INSTITUTIONAL LENS
THE INSTITUTIONAL LENS
Having a good map is only one piece of the puzzle for a smart explorer.
The other essential requirement is a healthy dose of self-awareness in
order to assess capabilities and constraints. In the Age of Discovery, an
explorers starting location determined the distance to his destination
and the potential routes that he could take. Portugals proximity to
Africa and the desire to find a sea-based route to Asia led to Portuguese
exploration south along the African coast. This process started with the
occupation of strategic islands such as Madeira and the Azores, followed
by staging posts along the coast in Mauritania and Ghana, culminating
famously with Vasco da Gamas landing in India.
A banks assessment of any international opportunity needs to take into
account its own starting point, as institution-specific capabilities and
constraints make some markets more or less attractive. Capabilities can
confer a competitive advantage and include business synergies, product
strengths, customer segment advantages, operational excellence or
simply the hard lessons garnered from past experience. Constraints
on the other hand (whether self-imposed financial hurdles or external
regulatory issues) can restrict an institution, making some markets or
business models less viable, more risky and ultimately less attractive.
CAPABILITIES
Without technological innovation, the Age of Discovery wouldnt have
been possible. With the invention of the compass and the sextant,
navigation now relied on mathematics instead of celestial observation.
Shallow draft Mediterranean ships also evolved into ocean-going
carvel ships with a planking method that enabled a stronger hull and
fully-rigged masts. In the annals of the great explorers, there is clearly
a survivor bias that reflects superior capabilities - both technical and
personal - as no one memorialized those adventurers whose masts broke
and hulls cracked somewhere in the great Southern Ocean.
Just like in todays banking market, another factor impacting exploration
was the availability of capital. As Columbus (an Italian) famously
showed, sometimes you needed to go outside your home market to be
bankrolled for these risky expeditions and find an investor willing to take
the risk (in his case the Spanish monarchs) in the hope of high returns.
The power of capabilities is that they can allow an institution to overcome
structural difficulties in a market, and help them see opportunities where
other institutions see only challenges.
Business synergies are created when a new venture can leverage current
operations. Cost synergies are particularly important in scale businesses
such as payments or transaction banking, where shared services and
transferable human capital can be deployed in new markets with only
THE INSTITUTIONAL LENS
23
minor tweaks. Synergies may also be realized
if new markets are material trading partners
with a banks domestic home base, raising the
probability that a new entrant can capture both
ends of a transaction. Standard Chartereds
build-out of its international trade finance
platform through investments in technology
as well as select portfolio acquisitions is
an example of international expansion
capitalizing on synergies across markets. Over
time, this strategy has built scale and achieved
critical mass, which in turn has generated a
strong track record of double-digit growth.
Strong product design and product
management capabilities can also provide
a rationale for international expansion. A
proven ability to achieve economic returns
where others struggle can transform a
superficially unattractive market into a
viable expansion opportunity. A good
example of a product-led strategy is US
Bancorps specialist merchant services arm,
Elavon, which has developed a significant
international presence by leveraging its
relationships with airlines and hotels and
offering dynamic currency solutions that
reduce FX costs for those merchants.
Service expertise can also be a viable
platform for market entry. The private wealth
and HNW customer segments are examples
of businesses where brand and history can
play a major role in shaping customers
perceptions of competence and service
quality (sometimes unduly). HSBC Premier
is a clear example of an international affluent
banking proposition that leverages brand
and a global service platform to tap into
this profitable segment across markets. On
a smaller scale, Scotiabanks stated intent
of targeting affluent Asians investing in
Canada in collaboration with local Chinese
institutions is another example of a bank
taking a service-led and segment-specific
approach to penetrating a foreign market.
The confidence to enter new markets can also
be based purely on operational excellence that
cuts across products and customer segments.
In retail banking, the difference in cost-income
ratios between leaders and laggards can be
measured in tens of percentage points, so
there is scope for operational excellence to
serve as a key differentiator and profit driver.
Experience offering high service levels with
thin network and direct banking models can
also offer the opportunity to leapfrog existing
bank branch network models and become a
disruptor. For example, in the North American
retail market the ability to harness customer-
facing technology to reduce branch network
costs while increasing perceived service levels
is emerging as a key differentiator. Canadas
TD Bank is using its own experience plus what
it gleaned from its acquisition of Commerce
Bank in the US to roll out branch performance
initiatives simultaneously on both sides of the
border. In wholesale banking, strong cross-
border payments or trading platforms can offer
distinctive execution abilities and the hard
lessons learned from past M&A can also confer
advantages when buying into new markets.
An important but softer capability relates
to culture. When considering international
expansion, national culture can be a double-
edged sword, but it can be leveraged as a
capability. When the target market has a similar
culture, synergies increase as business practices,
product expertise and human capital become
more transferable across borders. Institutions
who can use existing infrastructure and time-
tested operations with minor adjustments, can
create both structural and economic advantages
vis--vis other entrants. While dissimilar in
many ways, the cultural linkages between Spain
and Mexico have made the latter an attractive
expansion market for major Spanish banks.
While familiarity with national culture can
be an important capability, the same can
also be true of a banks own internal culture.
24 Copyright 2013 Oliver Wyman
HSBC has established itself as the worlds
local bank with an organizational culture
that prides itself on being adaptive to local
markets and understanding the subtleties
and nuances of each, and thus is able to
operate successfully in major markets
spanning Asia, the Middle East, Europe and
North America. Organizations like HSBC and
Citi with an established international business
can also build on an organization structure
that is used to dealing with the complexities of
global/region/country matrices, centralized
regulatory oversight and a mobile talent
base, all of which can lower execution risk
when looking at new markets.
CONSTRAINTS
The history of commercial exploration shows
that a good idea is not enough. The plans for
the Scots to establish a trading post at Darien
on the Isthmus of Panama in the late 17th
century and trans-ship goods from the Pacific
to the Atlantic was a great idea that preceded
the Panama Canal by nearly two centuries.
Stuck in a low-growth home market with limited
international trading opportunities, the Scottish
nobility decided that it was time to branch out
internationally. However, limited funding, poor
preparation for the hostile climate and an inability
to establish constructive relationships with the
indigenous population doomed the venture to
disaster and ultimately bankrupted the Scottish
nobility, which in turn led soon after to the union
of the Parliaments of Scotland and England.
While capabilities tilt the international
playing field in your favor, constraints are the
institution-specific challenges that make life
difficult for banks with international ambitions.
They can be internal, like short-term risk/return
requirements, or external, such as regulatory or
cultural considerations. Whatever their source,
they serve to raise the degree of difficulty
of international expansion by reducing the
attractiveness of particular markets.
One of the most important internal constraints
can often be an institutions own financial
ambitions. International forays dont typically
offer a short-term profit boost and the
most successful international players are
generally playing a long-term game, so often
a constraint comes in the form of risk-return
parameters designed for short-term domestic
profit optimization. While the returns from
foreign expansion can be attractive, they
can also require a high tolerance for risk
and shareholder capital that is patient and
long-term in nature. For example, while the
business has waxed and waned, Citibank has
had a presence in India for over a century.
In addition to return requirements, the
availability of capital and investment dollars
can also act as an internal constraint. In
some markets, the most viable entry strategy
may be through an acquisition that requires
significant upfront investment. When exploring
international opportunities, banks with a
solid capital base and the ability to raise
more will have a clear advantage. With most
of the European banking sector still needing
to recapitalize to international regulatory
standards, they may have precious little capital
left for any meaningful international plays.
Looking externally, home regulator concerns
can also limit banks international ambitions.
State banks may have explicit limitations
on foreign activity, but more common is the
pressure to bolster domestic operations at
the expense of international businesses; a
condition of state aid that has been relatively
common over the last five years.
At a more basic level, existing licenses
or grandfathered rights in a structurally
unattractive market may put certain foreign
institutions in an advantaged position
vis--vis other potential entrants. Simply
having stayed the course in many emerging
markets and not having been an institution
25
that has dipped in and out can confer its own advantages
over the long term through both legal positioning and
well-developed relationships with local regulators and
politicians. The flip side of course is that those who
are late to the international party can suffer from a
structural disadvantage that is very difficult to address,
as evidenced by the bidding frenzy for new banking
licenses in India.
Finally, the double-edged sword of culture can also
be an under-appreciated constraint. The history of
international banking is littered with the careers of
ambitious executives who strongly believed that if it
works here it will work there and saw their careers cut
short as a result. Even when there are strong surface
similarities of culture and language, the true business
realities can often be very different, as many of the
UK banks found with their forays into US retail and
commercial banking in the 1980s. When an institution
has limited experience with international expansion, any
synergies predicated on cultural overlap should come
with a health warning.
IMPACT OF CAPABILITIES AND
CONSTRAINTS ON THE MARKET MAP
A clear sighted understanding of both capabilities
and constraints will change the way a bank views the
attractiveness of a particular international market. Some
impacts will be positive and some will be negative, but
the important thing is that there is a disciplined and
comprehensive attempt (as indicated in Exhibit 8) to
understand the full range of issues and their net impact.
In Exhibit 9, we try and give some examples of how
this exercise can change the international map
for a specific bank and alter the perception of a
markets attractiveness.
Regulatory barriers that make certain markets
unattractive may not be as relevant for players with
an existing presence in those markets. For example,
banks with a banking license or grandfathered rights
in a typically closed market such as India may not
consider these markets as structurally unattractive as
a de novo market entrant would.
EXHIBIT 8: INFLUENCE OF INSTITUTIONAL CAPABILITIES AND CONSTRAINTS ON TARGET MARKET SELECTION
ECONOMIC CONSIDERATIONS STRUCTURAL CONSIDERATIONS
Market potential Profitability Market
concentration
Regulation Macroeconomic and
political stability
C
A
P
A
B
I
L
I
T
I
E
S
Business synergies
Brand affinity/lift Transferable
Capabilities
Fungible HC
Product strengths
New products
Growth potential
Niche products
Higher margins
Differentiated
products
Customer segment
advantage
Proprietary
customer insights
Affinity with select
customer segments
Executional
advantage
Executional
Excellence
M&A experience
Experience in
similar markets
Experience in
similar markets
Culture
Familiarity with
working environment
C
O
N
S
T
R
A
I
N
T
S
Risk/return Risk-return profile
render markets
unfavorable
Regulatory impact
on returns
Investment level/
time horizon
Capital controls
No capacity to
deploy capital
Time horizon
required for returns
Stability concerns
Regulatory
restrictions
Regulatory barriers
Unequal playing field
26 Copyright 2013 Oliver Wyman
On the execution dimension, a bank with a strong M&A
track record should have an operational advantage in
markets where acquisition targets are plentiful. For
example, in the fragmented US market becoming a
serial acquirer is a viable approach to market entry.
M&A experience can also be advantageous in high-
growth emerging markets like Indonesia, as rapid
market entry allows an institution to get material
benefits from short-term market growth.
The cultural angle comes into play in countries with
historical or language links. For examples, banks from
Spanish-speaking countries could have an advantage
in markets with a common language, but as the UK
to US example quoted above highlights, a common
language alone is not enough to ensure success.
For institutions looking to pursue a multi-domestic
international strategy, this disciplined process of
applying the institutional lens to identify competitive
advantages (and unique constraints) may be the
difference between success and failure.
In contrast to the banks pursuing a multi-local flag
planting approach, banks that focus on a customer-
enabling or trader strategy will typically be relatively
unconcerned with individual market attractiveness. They
will instead place far greater weight on international
trade and investment flows and will tend to think more
in terms of regions like Latin America or Southeast
Asia rather than individual countries. In their case, the
institutional view of market attractiveness is likely to be
determined by where their customers are expanding
and conducting business. Institutions that maintain
a presence in major international trade or investment
hubs can more easily follow their customers into new
markets e.g. by providing financial services to the same
customers in different countries, providing international
products from the home market, or financing foreign
suppliers. For them, key capabilities are likely to come in
the form of robust operational platforms in transaction
banking and trade finance and a strong presence in
selected trading hubs to maximize access to potential
customer flows. Constraints on the other hand may be
quite similar to the multi-local institutions, especially
around the need for patient long-term investment and
the challenges of accessing particular geographies from
a licensing and regulatory perspective.
EXHIBIT 9: APPLICATION OF THE INSTITUTIONAL LENS
Original position
on the market map
Change in market
attractiveness
based on institutions
characteristics
Executional advantage of
strong M&A experience
in similar markets
Regulatory advantage of
existing licenses or other
grandfathered rights
Cultural advantage of
common language,
culture and trade links
Examples of institutions
capabilities:
US
Japan
UK
Germany
France
China
Mexico
Peru
Malaysia
Canada
Switzerland
Singapore
South Africa
Brazil
Hong Kong
Turkey
Australia
Thailand
Italy
India
Indonesia
Spain
Russia
GCC
Scandinavia
Mexico
Brazil
Colombia
Peru
Spain
China
India
Indonesia
Malaysia
Peru
Thailand
Turkey Mexico
US
UK
Poland
Korea
Taiwan
STRUCTURAL INDEX
ECONOMIC INDEX
FAVORABLE UNFAVORABLE
HIGH
LOW Illustrative
Colombia
27
CHARTING A COURSE
CHARTING A COURSE
4
CHARTING A COURSE
Clearly, the search for a value-adding international banking strategy
has no single answer and no silver bullet. Defining an international
strategy is a complex process and each bank comes to the question
from a unique starting point. However, that being said, we do think
there are some strategic models that are worth considering as
examples of how different types of institutions have resolved this
challenge and charted a distinctive course. The four archetypes we
discuss in this section are certainly not comprehensive (and in some
cases not even mutually exclusive), but we do think it is instructive to
walk through how a specific strategy can emerge from the interplay
of broad market opportunities and bank-specific factors. None of
these case studies are intended to represent the strategy of a single
real institution, but they are intended to be specific enough to be
able to draw parallels to real world examples rather than just be
theoretical exercises.
THE RETAIL REPLICATOR
In the early nineteenth century, Britain was the pre-eminent cultural
and commercial replicator, adding over 10 million square miles of new
territory with a population of over 400 million in Asia, Canada, Australia
and Africa. After the defeat of Napoleon, the British had few challengers
on land or at sea, allowing it to fully utilize technologies such as steam-
powered ships for transport and the telegraph for communication. The
British effectively managed this scattered empire through a combination
of local cultural assimilation, martial rule, and technological innovation.
Even after post WW2 decolonization, the UK continued to maintain its
commercial and cultural linkages through the Commonwealth of Nations;
a set of relationships which still shapes trading patterns to this day.
CHARTING A COURSE
29
RETAIL REPLICATOR
Retail Replicators aim to export domestic retail success to
international markets. A glocal like HSBC and other multi-
local players such as Citi, Standard Chartered, Santander and
BBVA exemplify this strategy. The genesis is often a successful
full-service domestic bank recognizing that it has hit a
market share ceiling at home; that earnings will stagnate as
a result; and that looking overseas may offer opportunities to
duplicate domestic success. Going forward, we see increased
opportunities for more agile replicators who embrace new
business models such as thin network or fully mobile banking
in markets where mobile is already transforming society. In
many cases rather than just replicating a successful business
model, new markets can be the opportunity to evolve and
improve the model without the fear of cannibalization that
often plagues a home market. In the case study below, we
outline the strategy definition process for just such a bank a
large developed-market leader that is looking to diversify its
earnings via a twin-home market retail strategy.
SITUATION
A large North American domestic with a broad retail proposition operates as part of an oligopoly in its home market. The home market is
extremely saturated in the retail segment with limited capacity to capture share from other players. The bank is well capitalized and is seeking
expansion opportunities outside of its home market.
CAPABILITIES
Business synergies Potentially leverage existing human capital and operations due to similarity in cultures through e.g. transfer of staff,
retraining, operation shifts
Product strengths Strong retail proposition: longer business hours, additional banking services at branch increasing engagement,
alternate language offerings, cutting-edge mobile and internet offerings
Strong reputation for quality of service to retail customers with increased customer stickiness
Customer
segment advantage
Good understanding of mass affluent/high net worth customers in providing services for retail banking, and wealth
and asset management
Expected cross-sell opportunities with cross-border customers
Execution/inorganic
growth advantage
Superior execution managing large retail branch networks and achieving above average margins and high
branch utilization
STRATEGY
Footprint Expand into US due to risk-return alignment, market size and cultural similarities
Operate internationally under a twin-home model but adopt a thin-network approach in the US with more emphasis
on mobile technology and remote servicing
Potential for continued expansion into select attractive markets may be considered in the long-term move towards
a multi-local bank
Entry Enter through mid-sized retail bank acquisition with regional reach / key MSA coverage
Rebrand branches, restructure branch infrastructure/ layouts, and deploy retraining programs to align with winning
business tactics
Competitive advantage Operate US branches, applying executional know how to achieve above average utilization rates
Expand outside of core market using thin-branch network model to target attractive MSAs
Use well-run traditional branch network as foundation for aggressive mobile and thin-network expansion which also
provides important learnings for management of home country bank
CONSTRAINTS
Culture Strong preference for countries with common language and cultural affinity
Risk/return requirement Low to moderate risk profile preferred
Aim to keep returns broadly in line with current business model
Investment capability
and time horizon
No constraints due to recent sale of toxic assets after financial crisis
No explicit regulatory constraints in home market
Regulatory restrictions Regulatory reform in home market may negatively impact revenues and increase compliance costs
5 As of March 2013
CATEGORY KILLER
In contrast, Category Killers are specialist players who use
their product or sector dominance to expand internationally.
In asset management, Blackrock has capitalized on its scale to
expand outside the US into 27 countries, with ~40% of its total
$3.9 TN assets under management attributed to international
clients. CME Group has expanded from a domestic US
commodities exchange to become a global derivatives
powerhouse that has benefited from post-crisis regulatory
requirements for central clearing. And while payment
solutions provider First Data still derives the majority of its
revenues from the US, it continues to grow internationally
with partnerships and processing agreements in countries
as diverse as Poland, Turkey and China. While it is natural
for domestic category killers like First Data to adopt the
same model overseas, this play can also be used by broader
domestic institutions that recognize that their best chance of
being successful internationally is to play to a specific strong
suit; which in the example below is payments processing.
Given the rapid advances in payments technology,
international expansion can also be an opportunity to skip a
generation from a technology perspective and experiment in
a controlled way with new approaches that may be applicable
in home markets if they prove successful overseas.
SITUATION
A large North American regional universal, with most operations confined to US and Canada, is re-evaluating its international strategy post-
crisis. Its primary international presence is through its specialist merchant acquiring arm. Due to impending saturation in the US and European
markets, where the merchant arm maintains significant market share, the bank is seeking further growth opportunities in new markets.
CAPABILITIES
Business synergies Internationally enabled payment processing platform that can be easily adapted and leveraged in multiple markets
Product strengths Specialist arm leverages robust cross-border payment processing platform with strong fraud management system
Experience in developing regional payment solutions
Innovative mobile payments offering with experience in increasing merchant take-up
Customer segment advantage Strong understanding of SME sector with tailored solutions for banking and payment needs
Execution/inorganic
growth advantage
Successful track record in smaller acquisitions
Numerous successful partnerships in the payments business domestically and in Europe
STRATEGY
Footprint
Target markets have established payments infrastructure, favorable regulatory environments and dynamic
retail sectors
Expansion into neighboring markets such as Mexico, Brazil and potentially other LatAm markets, with double
digit annual credit card growth
Operate under hub-and-spoke model to centralize processing and capture volume through global banks
Entry
Partnerships or joint ventures with global banking institutions and local players to benefit from established
brand recognition during initial entry
Acquire local payment solutions providers in markets with limited participation by global banks
Drive technology innovation in the local payments market without fear of cannibalizing an existing business
Over time use payments and merchant acquiring relationships and the data that flows from them as a basis for
developing innovative small business lending products
Competitive advantage
Deploy IT platform and processing systems
Continue to explore and innovate payment and mobile products, utilizing SME know-how to deliver specialized
solutions to small merchants
CONSTRAINTS
Culture Not considered as a constraint as entry model adapted to minimize cultural differences
Risk/return requirement Scale is priority over return in short term to gain market share in new markets
Investment capability and
time horizon
No investment constraints given strong capital base
Long-term time horizon necessary to achieve scale
Regulatory restrictions Regulatory reform in home market may negatively impact revenues and increase compliance costs
31 31
CULTURAL CONNECTOR
Cultural Connectors have strategies predicated on
regional, cultural or trade-flow led links. Weve already
discussed Santanders leverage of a common language
and culture to expand from Spain across South America.
Another good example in the region is Bancolombia
which has expanded into Panama, Guatemala, and El
Salvador, capitalizing on common culture and strong
regional business links to diversify its footprint and
create growth options. In Europe, French player BNP
Paribas has maintained a banking presence in colonial
French-speaking West Africa, with retail operations
in Cte dIvoire, Mali, Burkina Faso, Guinea, and
Senegal. In todays changing environment, cultural
affinity can go beyond the obvious to newer types of
cultural understanding such as the buying patterns of a
particular HNW wealth segment or at the other end of
the spectrum the social media behavior of millenials in
Asian markets like South Korea and Taiwan. The Cultural
Connectors not only have confidence in their ability to
understand and operate a good business model in a
market but they also often leverage historic political and
business links to help them overcome barriers to entry
and constraints that may be off putting for those not
familiar with the culture they are entering.
SITUATION
A top 20 Latin American bank has a leading position in both retail and wholesale segments of its home market. The bank has a strong
capital base and can access international capital markets (both debt and equity). Due to the high concentration of profits generated
from the home market, the bank seeks geographic diversification.
CAPABILITIES
Business synergies Potential for cross-selling given broad range of products developed in home market
Access to international capital markets provides lower funding costs, which can be leveraged in other countries
Product strengths Large variety of specialized retail and commercial banking products
Service-oriented proposition
Customer segment advantage Universal banking model with experience across all segments (retail, wholesale, capital markets, insurance, pensions)
Execution/inorganic
growth advantage
Strong M&A capabilities based on domestic transactions
Experience through all stages of development of banking sector in home market
STRATEGY
Footprint Expand in Latin America given common language, cultural affinity and trade flows
Preference for smaller countries with less developed banking sectors and lower competition due to past
successful experience in home market in similar conditions
Operate under a portfolio model
Entry Expand through acquisition to build scale more rapidly and benefit from short-term growth and margins
Competitive advantage Leverage retail and commercial banking expertise to gain competitive advantage by implementing best
practices developed in home market
Improve funding opportunities for target acquisitions through capital markets access
CONSTRAINTS
Culture Strong preference for countries with common language and cultural affinity
Risk/return requirement Return required similar to home market
Need to reduce risk of geographic concentration
Investment capability and
time horizon
Despite strong capital base, large transactions would require raising additional capital
Regulatory restrictions No explicit regulatory constraints in home market
Copyright 2013 Oliver Wyman
THE HITCHHIKER
Finally, The Hitchhikers are banks who adopt a follow
your customer model by providing enabling products
to their increasingly globalizing customer base. This
is a strategy typically used by mid-sized domestics or
relatively smaller players globally, but when successful it
can be a first step towards a larger international presence
in the future. With rising exports and greater international
connectivity in supply chains, more and smaller companies
are participating in cross-border activities driving up
demand for international products in the corporate sector.
Wells Fargos international corporate banking presence
was driven in part by the international expansion of US
mid-market companies, offering products such as trade
financing, cross border lending, and supply chain finance.
In other examples, regional US bank PNC provides global
advisory services, leveraging its team of ex-treasurers to
help clients with global challenges, such as adapting to local
business customs and evaluating the creditworthiness of
trading partners. Japanese bank Sumitomo Mitsui Banking
Corporation has developed joint ventures and partnerships
in countries such as Turkey, India, and Cambodia, to provide
services for its Japanese corporate customers. On the retail
remittance side of the equation, the opportunities remain
niche, although they are increasingly being used as a starter
product for banks with bigger ambitions on either side of
the flow. Examples include South Asian banks tapping
into the remittance flows from the Gulf, Canadian banks
tapping into the immigrant communities from China, and
US banks seeking to benefit from the Mexican community
in the US sending funds to family south of the border.
SITUATION
A mid-sized bank in a large developed market with strong position in the SME/middle market segment. The bank does not
operate in foreign countries, but its customer base is increasingly global: local clients are now dealing with international suppliers
or customers while, at the same time, foreign multinationals are establishing subsidiaries in the banks home market. The bank
seeks to adapt to its changing customer base.
CAPABILITIES
Business synergies No significant international synergies
Product strengths Strong products for local SMEs and middle market companies
However, weaker product offerings for customers conducting international businesses
Customer segment advantage Strong position and brand with middle market companies and SMEs
Execution/inorganic
growth advantage
Lack of presence in foreign markets suggest, low execution advantage
STRATEGY
Footprint Stay in home market, which remains attractive given market fragmentation and large potential in the
underserved SME segment
Entry Potential for white-label partnerships with other domestic players to expand product offerings
Competitive advantage Defensive strategy to retain current customers and enable growth of their global businesses:
Expand product mix to offer multi-currency accounts payments and FX solutions
Expand corresponding bank network to increase reach of trade finance capabilities
Offensive strategy to expand customer base domestically, delivering core commercial banking products
(e.g. lending and treasury) to subsidiaries of foreign companies entering home market
CONSTRAINTS
Culture Lack of experience operating in foreign countries
High sensitivity to political and economic stability
Risk/return requirement Low risk and moderate returns preferred
Investment capability and
time horizon
Capital base under some pressure due to increased regulatory burden
Regulatory restrictions Higher regulatory burden in home market
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CONCLUDING THOUGHTS
Given the regulatory drive towards localization and the
wounded state of the banking industry in much of the
developed world, it may seem counterintuitive to be
discussing international strategy. However, for many high-
performing institutions in consolidated markets the time to
look abroad is now if they want to sow seeds to be harvested
in 2020. With the prospect of sustained low economic growth
and low interest rates in much of the developed world,
international expansion provides a route to deploying capital
in high-growth markets and creating diversified earnings.
Regardless of where you are starting from, the challenge
can look daunting and fraught with risks. For every success
story, the history of international banking is littered with
failures and aborted expansion attempts. The next big thing
has often turned out to be a bear-trap of regulatory and
cultural complexities that can absorb huge investment for
little return. An analysis of the common pitfalls indicates that
focus and discipline are absolutely essential. So the decision
to rethink international strategy must be approached with
objectivity and caution. For banks still dealing with the
aftermath of the crisis, it may make perfect sense to focus on
rationalizing and optimizing your existing business footprint
and possibly retrenching from current international markets.
However, for multi-locals in positions of strength and even
for successful domestic institutions with no international
footprint, evaluating the alternatives in the new normal will
ensure they go forward with their eyes open. For some, this
may lead to a positive decision on international expansion,
while for others the best course may indeed be to stay home
and concentrate on the domestic franchise.
A structured and disciplined approach that combines
accurate market information and a strong awareness of your
own strengths and weakness as an organization will serve
an institution well in the long run. Given the potential of the
global economy, opportunities for international growth do
clearly exist. The starting point will make a big difference to
the relative attractiveness of those opportunities, but this
may be a point in time where fortune favors the brave and
where an institution can make its own luck by being better
informed and more self-aware than its competition.
The map of market opportunities is available to everyone.
What will separate the winners from the losers is more
likely to be a well-articulated understanding of institutional
capabilities and constraints and the willingness to
maybe take the path less travelled based on that self-
awareness. The key will be in identifying where and how
as an institution you can bring something distinctive to a
specific market or customer segment. Even if the current
answer is no, a proactive review of your international
portfolio strategy will at a minimum ensure that you are well
positioned to react to opportunistic situations as they arise.
Key steps in this type of review should include:
Clarifying the rationale, ambition and objectives
of an international strategy including the financial
parameters and constraints
Creating your own explorers map that takes an
objective view of global opportunities
Inventorying your current business and customer
portfolio across geography, product scope and client
franchise to truly understand your assets
Identifying other hidden capabilities and constraints
that could modify market attractiveness either positively
or negatively
Applying your bank-specific lens to the explorers map
to understand where you may be advantaged and have
an edge versus your competitors
Figuring out if the resulting opportunity set satisfies
your financial constraints and hopefully prioritizing
among a wealth of options
As the international banking community emerges into the
post financial crisis world, it is time for individual institutions
to draw their own maps and use their own compasses. While
the locals may not always be welcoming and the voyages
may be a little rough at times, there are opportunities out
there and the long-term winners in the global banking
industry are likely to be those who have the ambition to load
up their ships and chart a new course. Adventure (and maybe
El Dorado) is out there . . .
INTERNATIONAL BANKING STRATEGY
THE QUEST FOR EL DORADO?
AUTHORS
Alan McIntyre
Chaitra Chandrasekhar
www.oliverwyman.com
Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialized expertise in
strategy, operations, risk management, and organization transformation.
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Copyright 2013 Oliver Wyman
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ABOUT THE AUTHORS
Alan McIntyre is Managing Partner for Oliver Wyman North America and a Partner in the Financial Services Practice
Chaitra Chandrasekhar is a Manager in the Americas Retail & Business Banking Practice