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 explorer’S 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

1The 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 ride…if 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 Fbo1 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 2013e2012e

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 firms 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

3

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

TOP-10 BANK RETURN ON EQUITYROE %

Ind

ones

ia

Ch

ina

Bra

zil

Can

ada

Turk

ey

Ru

ssia

Ind

ia

Mex

ico

Au

stra

lia

USA

Euro

pe

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, Seb’s retail

banking business in germany and two banks

in poland. Canadian banks have also been

acquirers, as evidenced by Td’s uS acquisitions

of Commerce bank and Chrysler Financial Corp,

bank of montreal’s uS acquisition of marshall

& ilsley, and Scotiabank’s serial acquisitions

in latin america, the Caribbean and asia.

other recent and notable international

expansions include Sberbank’s foray into

eight Cee countries, banco itau’s nascent

growth efforts in peru, Colombia and Chile,

Cimb’s acquisition of most of rbS’s investment

banking operations in asia, and mitsubishi

uFJ’s 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 isn’t 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 banking2.

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

PRICE-TO-BOOK RATIO

66 percentile price-to-book

33 percentile price-to-book

Price-to-bookof top banks

Ru

ssia

USA

Ch

ina

Bra

zil

Can

ada

Au

stra

lia

Ind

ia

Euro

pe

Ind

ones

ia

Turk

ey

Mex

ico

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 explorer’s Map

2The explorer’S 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 world’s

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 explorer’S map

Medium potential markets due to significant structuralissues such as entry barriers, unequal playing field

High potential markets with attractive financial sectoreconomics and favorable market structure dynamics

such as ease of entry, fragmentation

Low potential markets with poor financial sector dynamicsas well as limited structural advantage for foreign banks

Medium-low potential markets with moderatelyfree market structures but limited financial

returns primarily due to economic stagnation

FAVORABLEUNFAVORABLE

ECONOMIC INDEX

HIGH

LOW

United States

Canada MexicoBrazil

Colombia

Peru

United KingdomFrance

Germany

Spain

Italy

Russia

Poland

Switzerland

Scandinavia

ChinaIndia

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 operations3.

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 Eastand Africa

Asia and Oceania

Revenue in 2020

% of worldrevenue

(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 india’s 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. China’s 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 hasn’t 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 history’s 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 trillion4 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, america’s 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 (2009–2011)

10%

GROWTH IN FDI POSITION 2009–2011

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 $BN2011 trade volume

North-North

APAC-APAC

% of globalFDI 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 europe’s

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

3The 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

explorer’s starting location determined the distance to his destination

and the potential routes that he could take. Portugal’s 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 Gama’s landing in India.

a bank’s 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 wouldn’t 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 today’s 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 bank’s domestic home base, raising the

probability that a new entrant can capture both

ends of a transaction. Standard Chartered’s

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

bancorp’s 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, Scotiabank’s 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. Canada’s

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-à-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 bank’s own internal culture.

24 Copyright © 2013 oliver Wyman

hSbC has established itself as the “world’s

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 institution’s own financial

ambitions. international forays don’t 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-à-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

market’s 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

ca

pab

ilit

iES

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

co

NS

tra

iNtS

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 marketattractivenessbased on institution’scharacteristics

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 KongTurkey

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

FAVORABLEUNFAVORABLE

HIGH

LOW Illustrative

Colombia

27

Charting a CourseCharTINg 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

3131

CulTural ConneCTor

“Cultural Connectors” have strategies predicated on

regional, cultural or trade-flow led links. We’ve already

discussed Santander’s 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 Côte d’ivoire, mali, burkina Faso, guinea, and

Senegal. in today’s 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 Fargo’s 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 bank’s 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

33

concluding thoughtSgiven 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 explorer’s 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

all rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of oliver Wyman and oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect.

The information and opinions in this report were prepared by oliver Wyman. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisors. oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. oliver Wyman disclaims any responsibility to update the information or conclusions in this report. oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. The report is not an offer to buy or sell securities or a solicitation of an offer to buy or sell securities. This report may not be sold without the written consent of oliver Wyman.

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