Challenges and Opportunities for Chinese and Indian Banks to Emerge as Global Players

Transcription

1 Challenges and Opportunities for Chinese and Indian Banks to Emerge as Global Players Lito Camacho Vice Chairman Asia Pacific, Credit Suisse Ladies and gentlemen, honoured guests. Good morning and thank you all for coming to this session. I am Lito Camacho, Credit Suisse s Vice Chairman for Asia Pacific. It s my privilege to be with you here in Colombo and I would like to thank the Asian Bankers Association for giving me another opportunity to speak at your annual meeting. I spoke many years ago when I was still the Secretary of Finance for the Philippines and more recently, in your last gathering in Manila. Today, I have been asked to discuss an exciting topic: challenges and opportunities for Chinese and Indian banks to emerge as global players. As we all know, China and India are two of the world s most exciting emerging economies. China is already the world s second biggest economy. As the developed economies of the US, Europe and Japan continue to struggle with low rates of growth and high levels of debt, China and India are often seen as bastions of growth and dynamism in an otherwise bleak global economic picture. Indeed, the last financial crisis accelerated a rebalancing of the world economy. Asia is well on the way to recapturing the lion s share of global output that it has historically enjoyed. Almost 200 years ago, Asia represented 59.4% of global GDP with China and India contributing 32.9% and 16%, respectively. Speech delivered during the 28 th General Meeting and Conference of the Asian Bankers Association held in Colombo, Sri Lanka on October 4,

2 China already has the two biggest banks in the world by market capitalization and four of the top 10. Three Indian banks are among the top 20 in Asia Pacific by market cap, and McKinsey forecasts that the total balance sheet size of Indian banks will grow tenfold to reach US$10 trillion by So doesn t it make sense that Chinese and Indian banks global presence should reflect the rising economic strength of non-japan Asia, just as European and American banks expanded around the world during the many decades of unquestionable western economic supremacy? Isn t it time for Chinese and Indian banks to go global? I want to sound a note of caution here. The Chindia superlatives we read in the newspapers often give the impression that China and 2

3 India are financial and industrial powerhouses that are rapidly taking over the world. The truth, as usual, is more complicated. Chinese and Indian banks are certainly in a position to expand overseas, and they are beginning to do so. But I will argue today that a headlong rush into new markets is probably not the most effective way for Chinese and Indian banks to achieve a global presence commensurate with their global economic influence. On the contrary, I believe that a more measured and phased approach to international expansion is the ideal path for the Chinese and Indian banks, and that a truly global mentality needs to be developed within the management of these institutions for expansion of this kind to succeed. And I will also argue that the globalization of Chinese and Indian banks cannot and should not be isolated from the increasing liberalization of their home markets. 3

4 Reality Check So let s begin with a reality check: China and India are developing nations with developing banking systems. However colossal financial institutions in China and India are, the sophistication of their banking operations, infrastructure and technology cannot yet be compared with those of banks in developed markets. Indeed, China and India continue to face the more fundamental challenge of financial inclusion. According to the World Bank, India has around 3.5 ATMs and fewer than 10 bank branches per 100,000 people. China is actually behind on these measures. And you can compare this with OECD countries, where there are nearly 30 branches and 90 ATMs per 100,000 people. Banks in China and India face other challenges, too. They need to invest in and upgrade their information technology, operational and risk management systems, for instance. There is no question that this is happening and at a rapid pace but it is very much a work in progress. Industry experts expect rapid growth in technology spending by Asian banks over the next decade, but regard Asian emerging markets such as China and India as essentially a greenfield site for banking technology at present. Research firm Ovum expects Asia Pacific spending on retail banking technology to increase by 49% to hit US$28 billion by By that time, Chinese banks alone are expected to spend nearly US$8 billion and Indian banks nearly US$ 3 billion a year on retail technology, while these two countries will record the fastest rates of spending growth over this period. This investment is expected to be made in areas such as online and mobile banking, technology in branches and channel integration. Ovum also expects heavy investment in technologies that reduce costs, such as data management, business intelligence and analytics. They forecast that middle office technology spending in areas like 4

5 risk management, anti-fraud, compliance and performance management will grow by 51% in emerging Asia Pacific between 2010 and 2015, hitting US$650 million. While it s encouraging to see such substantial investments in modernizing banking technology, the scale of this spending reflects the scale of the task and the gap, and it s notable that banks from emerging Asia are investing in areas where most developed world banks already have sophisticated technology in place. There are also risk management questions to address. After two years of scorching loan growth, Chinese banks now face the threat of deteriorating asset quality. Credit Suisse forecasts that nonperforming loans will rise from 1.1%-1.2% to 1.8% in 2012 and around 2.5% in Credit Suisse also forecasts a decline in Indian banks asset quality. In fairness, developed markets banks are no strangers to NPLs either as we have seen in the recent global financial crisis. But weakening asset quality for Chinese and Indian lenders must remain a cause for concern. So while Chinese and Indian banks unquestionably have the scale and financial firepower today to expand their presence in new markets overseas, I would argue that this is not the time for a headlong rush to acquire major banking assets, especially in developed markets. A Chinese or Indian bank acquiring a bank in say, Spain or Italy, would be acquiring a business that would be very unfamiliar to them from a strategic, operational and technological perspective. And whether the Chinese or Indian bank was acquiring an existing player or investing in growing its own presence in a developed market, it would still face a very different regulatory and competitive environment to what it would be used to at home. I think you will agree, ladies and gentlemen, that this may not be an ideal scenario for success, and that it may even hold potential risks. 5

6 Expansion path beyond home markets I believe, however, that Chinese and Indian banks can continue their expansion path beyond their home markets while avoiding these pitfalls. First of all, it s clear that the banking sectors of China and India need to continue their rapid modernization, upgrading their technology, operations, risk management and compliance processes. This will be essential for successful investment in developed markets in the future. Right now, I think it makes sense for Chinese and Indian banks to explore a phased approach to international expansion. It s natural that this should start here in Asia Pacific and in other emerging markets around the world. And as I said, this is already happening. 6

7 The world s biggest bank by market capitalization, Industrial and Commercial Bank of China, has been a pioneer in this field. In August, ICBC announced the acquisition of 80% of Standard Bank Argentina for US$600 million, the first acquisition by a Chinese financial institution in Latin America. The acquisition also expanded ICBC s overseas branch network from approximately 200 to 300. This followed ICBC s 2007 acquisition of 20% of Standard Bank in South Africa for US$5.6 billion. China Merchants Bank has also invested beyond mainland China, acquiring Hong Kong s Wing Lung Bank for US$4.66 billion in While there has been much talk for several years about major Indian public and private sector banks making overseas acquisition, little has so far been realized. However, it is worth noting that India s biggest bank, State Bank of India, is contemplating acquisitions in Africa and Southeast Asia. The country s biggest private sector bank, ICICI Bank, recently launched its second retail branch in Singapore and also has units scattered across 19 countries, including China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Focusing on emerging markets makes sense for Chinese and Indian banks in the earlier stages of international growth. These markets present an ideal opportunity to learn about adapting product ranges, risk management capabilities, operations, internal procedures and marketing strategies in new environments that are more similar to home. And let s not forget that emerging markets beyond China and India represent a more compelling business opportunity for all banks more so than many developed markets. The expansion of Southeast Asia s CIMB Group or DBS offers a useful point of reference in this respect. Having started in Malaysia, CIMB s ambition to become a regional universal bank has driven it to expand in Singapore, Indonesia, Thailand, Cambodia and even China. More than one third of CIMB Group s revenues and assets came from outside Malaysia in

8 Similarly, Singapore s DBS made 64% and 22% of its 2010 net profit in Singapore and Hong Kong, respectively, and now has 18 branches in China, 12 branches in India and a subsidiary with 40 branches in Indonesia, among other regional investments. Like those made by ICBC, DBS and CIMB, I expect that future acquisitions by Chinese and Indian banks in Asia and emerging markets should be accretive and manageable. The objective should be to grow and build, and not to transform. The logical emphasis should be on easy integration and establishing a foothold in new markets that have strong similarities with or links to the home market. This is eminently achievable for Chinese and Indian banks. Both nations have strong trade, diplomatic and cultural ties with the rest of Asia. And both are increasingly large investors in other emerging markets, particularly in the natural resources sector, for China. 8

9 So-called South-South foreign direct investment is an emerging theme that excites many analysts not to mention us at Credit Suisse and China and India are at the forefront of this trend. According to one 2010 estimate, the total value of Chinese FDI in Africa is US$30-40 billion, while India had built up investments worth US$14-20 billion in Africa even before Bharti Airtel spent nearly US$11 bullion buying the African assets of Kuwait-based Zain. It s a similar story in Latin America, where FDI grew by about 40% in 2010 to reach US$113 billion, according to a United Nations study. China is the fastest-growing investor in the region, now accounting for 9% of all FDI flows. Over 90% of confirmed Chinese investments in Latin America has been in the natural resources sector. Following the clients breaking new ground abroad Chinese and Indian banks should continue to follow their clients as they break new ground abroad. And from a strong regional and emerging markets platform, these banks will be ideally positioned to contemplate more substantial acquisitions, including those in developed markets. Their industrial counterparts have already made this step. Indeed, foreign acquisitions by Chinese and Indian companies mean that the division between banking emerging markets and developed markets clients is not as distinct as it once was. Take Jaguar Land Rover, for example, which was acquired for US$2.3 billion by India s Tata Motors in After the acquisition, the group decided to undertake research and engineering activities aimed at achieving reductions in Co2 emissions to meet targets set by the European Commission. The European Investment Bank was able to provide cost-effective funding for this project but required guarantees from banks rated single-a or higher. At the same time, major Indian public sector 9

10 banks with a lower rating were happy to take Tata Motors credit risk but could not provide funded loans direct to JLR. I m proud to say that Credit Suisse structured a transaction for JLR which enabled the EIB to provide the funding, but where the underlying credit risk was taken by the Indian banks. Apart from wanting to draw attention to an innovative Credit Suisse deal, my point here is that Indian banks are being drawn into the financial systems of developed markets by their clients, whether they plan for it or not. The globalization of banks from Asian emerging markets is in its dawn, but it has already started. There is no reason why Chinese and Indian banks cannot follow their corporate clients wherever they go: into emerging and ultimately developed markets. But banks will need to emulate their clients in demonstrating a capacity to adapt if they are going to be successful. 10

11 It s worth continuing with the example of Tata Motors in this respect. The company understands very well that the products they offer through JLR are very different to what they offer under the Tata Motors marque and that the two businesses require quite different skill sets. They know that a potential Jaguar buyer in London wants something different to a potential Tata Nano buyer in Bangalore. Both want transport, certainly, and both are attracted by the brand. But those brands make contrasting promises. I would say Jaguar means exclusivity, elegance, performance and tradition, while the Tata Nano stands for economy, simplicity, maneuverability and reliability. I hope I have not exhausted the analogy. But I hope you see my point, ladies and gentlemen: a Chinese or Indian bank that wants to succeed in developed markets will have to radically adapt its brand, product range and business lines. One encouraging aspect of Tata Motors success with JLR is that it demonstrates that consumers in developed markets are not worried by new set of owners for premium brands, as long as they are seen to respect the values of the brand they have acquired. So I am sure there will come a time when Chinese and Indian banks can acquire well-known banking brands in the west and thrive with them. To do that successfully will require intense study of the financial sectors in these markets, though, in addition to the upgrading of domestic businesses I mentioned earlier. Simply being a Chinese or Indian bank in, say, France or South Africa, will not be enough. The management of these banks must feel at at home in France and South Africa. To truly thrive in the global arena, Chinese and Indian banks are going to need a truly global mentality. I believe acquiring this mentality starts at home. Chinese and Indian banks face very little competition from foreign players. In 2010, just 2% of Chinese banking assets and 7% of Indian assets were in the hands of foreign banks. Continued reform and liberalization of the 11

12 banking sectors of China and India will clearly benefit customers in those markets. But it will be also provide critical preparation to Chinese and Indian banks for succeeding against global competition. This liberalization will also address the need for reciprocity which policymakers and regulators in developed economies will likely require before allowing Chinese and Indian banks to control significant financial institutions in their markets. The prerequisite strengthening of their technology, risk management, operations, and corporate governance will go a long to convince home regulators on the developed markets. 12

13 Summary In summary, I would like to highlight the following: 1. I am confident that Chinese and Indian banks can emerge as global players and it is just a question of when. 2. I believe this will follow the upgrading of their domestic businesses including technology, risk management, operations, and corporate governance. 3. I would advise that this can be more effectively achieved through a disciplined and phased approach that starts in Asia and other emerging markets. 4. There are many lessons that can be learned from other Asian industrial companies that have successfully become global multinationals like Tata Motors and the Sony s, Toyota s and 13

14 Samsung s before them. This is the need to developed the global mindset that can operate competitively in different markets and not just be bigger Chinese and Indian banks overseas. 5. And finally, expansion into developed markets will happen in the future but the best way to prepare for that today may be through greater competition from international banks in China and India themselves. Thank you very much for your kind attention and I would be happy to take any questions you may have. 14