They might be
A special report on banking in emerging markets l May 15th 2010
The Economist May 15th 2010                                                                       A special report on bank...
2 A special report on banking in emerging markets                                                               The Econom...
The Economist May 15th 2010                                                                                         A spec...
4 A special report on banking in emerging markets                                                                   The Ec...
The Economist May 15th 2010                                                             A special report on banking in eme...
6 A special report on banking in emerging markets                                                                The Econo...
The Economist May 15th 2010                                                              A special report on banking in em...
8 A special report on banking in emerging markets                                                                    The E...
The Economist May 15th 2010                                                                                         A spec...
10 A special report on banking in emerging markets                                                                        ...
The Economist May 15th 2010                                                            A special report on banking in emer...
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  1. 1. They might be giants A special report on banking in emerging markets l May 15th 2010
  2. 2. The Economist May 15th 2010 A special report on banking in emerging markets 1 They might be giants Also in this section The bigger and bigger picture The developing world’s banks are ourishing. Page 2 Rambo in cu s Balance-sheets are less powerful than they look. Page 5 Domestic duties CCB, China’s second-biggest bank, exempli- es the size of the task at home. Page 7 Mutually assured existence Public and private banks have reached a modus vivendi. Page 8 We lucky few For Western rms the barriers to entry into emerging-market banking are daunting. Page 10 Emerging-market banks have raced ahead despite the nancial crisis Breaking and entering as their Western colleagues have languished. Patrick Foulis asks how Why it is hard to copy Santander. Page 12 they will use their new-found strength Old friends only A LONG the breezy three-kilometre stretch of Mumbai’s Marine Drive you pass cricket pitches, destitute people, luxu- banks in the developing world now mea- sure up. Not only are they well capitalised and well funded, they are really big and To do well in China, Western banks need a long history. Page 14 ry hotels, plump joggers and advertise- are enjoying rapid growth. By pro ts, Tier-1 ments for Indian multinational compa- capital, dividends and market value they All the world’s a stage nies, but almost no bank branches or cash now account for a quarter to half of the machines. That absence, suggests O.P. global banking industry. China’s lenders But emerging-market banks are still treading Bhatt, chairman of State Bank of India, the head the list of banks by market value, and cautiously abroad. Page 15 country’s biggest lender, gives the visitor a Brazilian and Russian banks are among the hint of the potential for the banking indus- world’s top 25. At current growth rates In- A door to Africa try. Marine Drive has been underbanked dia’s banks will catch up in a decade. The Standard Bank reaps the bene t of bold since it was built in the 1930s. But now crisis in Western banking, still reverberat- thinking. Page 16 there is a palpable sense in India, as in ing in southern Europe, seems to have ac- most other emerging economies, that celerated the shift in banking muscle from Cross your ngers banking is thriving just as it has fallen into rich countries to the developing world. Emerging-market banks have done remark- disrepute in many Western countries. This special report will argue that most ably well, but they need all the luck they The emerging world has a history of vo- of that muscle will be needed at home. To can get. Page 17 latility and of bad-debt problems indeed support the fast credit growth their popula- China is grappling with such a problem at tions and politicians demand, and the bad the moment. But developing-country debts it may cause, emerging-market banks now have got things right on a num- banks will need more capital than they can Acknowledgments ber of fronts. Anti-poverty campaigners generate from retained pro ts. They are the In addition to those mentioned in the text, the author can admire their e orts to o er banking pre-eminent gatherers of savings in the would like to thank the following for their help in preparing this special report: Shannon Bell, Sanjiv services to the illiterate. Technology gurus world, a mirror image of Western banks Chadha, John Cheetham, William Cheng, Charudatta can see new mobile applications and low- that became huge borrowers. But they will Deshpande, Paul Edwards, Peter Grei , James Gri ths, cost IT platforms, and industrialists can struggle to use those excess deposits Paul Harris, Hu Changmiao, Angela Hui, Neeraj Jha, Erik Larsen, Ed Lin, Paul Marriott, Lucia Porto, Huw van count on banks that actually want to lend abroad without taking dangerous curren- Steenis, Salina Tong, Jonathan Tracey, Milya Vered and to their rms. Regulation bu s see an in- cy risks, so the job of recycling excess sav- Rahul Virkar. dustry that is both armour-plated and ings abroad will remain with central banks wrapped in cotton wool after the crises of and sovereign-wealth funds. The manag- A list of sources is at the late 1990s and early 2000s. In most ers of emerging-market banks have plenty emerging economies banks are viewed as to do as it is. Some of them already run or- engines of development rather than as ganisations that are far bigger than the big- An audio interview with the author is at rent-seeking parasites. gest Western banks. Most also expect to But it is by the hard stu , money, that lose corporate customers to local bond 1
  3. 3. 2 A special report on banking in emerging markets The Economist May 15th 2010 2 markets and to have to build up their con- Both those models are almost impossi- can export. For the Indians that may be sumer- and investment-banking opera- ble to replicate now. The network banks low-cost technology; for the Brazilians, in- tions to compensate. Many, too, are nding are the products of a century of expansion. vestment-banking savvy. Some of the big- innovative ways to o er banking services They are su ciently entrenched for Citi- gest emerging-market banks are experi- to poor people without losing money. group’s near-collapse in New York, for in- menting with small acquisitions in their If the crisis has transformed the status stance, to cause minimal damage to its near abroad . Going global requires the of emerging-market banks, it has also emerging-market business. The gone na- successful integration of lots of acquisi- transformed the role of the state in bank- tive banks seized unique opportunities in tions, which Western banks have found ing. In China, which had been relaxing its the 1990s and early 2000s as Latin America hard to do. grip on the industry for a decade, the gov- sold o banks after bad-debt crises and This special report will show that the ernment directed the banks to continue eastern Europe privatised after commu- globalisation of banking, which has dri- lending during 2008 and 2009 the main nism’s fall. No such sell-o looks remotely ven the industry for two decades, is in reason why the economy continued to likely soon in China, India or Russia. Even many ways on hold. If emerging econo- grow fast. In Brazil, India and Russia the the traditional last-resort technique for mies are much more sceptical about unfet- state banks have seen a sharp improve- banks that want to become more interna- tered nance and the role of foreign banks, ment in their fortunes, gaining market tional setting up a few branches overseas Western societies are much more hostile to share at the expense of private banks. and borrowing from headquarters or banks in general, let alone those run by for- Some Western banks operating in devel- wholesale markets to fund lending there eigners or, worse still, foreign govern- oping countries have lived up to their rep- has become much harder as regulators are ments. Although emerging-market banks utation as unreliable partners. That is like- clamping down on it. have far healthier business models than ly to have long-term consequences. The Western rms do, many of them will face a banking system most emerging economies The di culty is mutual di cult trade-o . They will need access to now want is a mix of entrepreneurial priv- The only consolation for Western rms foreign countries in order to build the sort ate rms and state banks, with a few well- that cannot get in is that emerging-market of large-scale operations that make money. run foreign ones to keep the locals honest. banks are facing exactly the same set of To get it, they may have to show that they That has big implications for the long problems as they try to expand abroad. For are at arm’s length, or even entirely de- list of Western rms desperate to gain them the crisis came too soon. With anoth- tached, from their governments. Yet the cri- more exposure to emerging economies. er decade under their belt they might have sis has pushed most banks in the develop- The crisis has underscored the attractions had the size, excess capital and skills to ing world the other way. of two business models. The network seize the moment and buy big bombed- These banks have been pitched into the banks, such as Citigroup or HSBC, have a out banks at the peak of the crisis. As it is, big league rather suddenly, helped by the presence in lots of countries to make life most are having to embrace gradualist woes of Western banks and the continued easier for their customers. The gone na- strategies. All are building strings of strong growth in their own economies. It tive ones, such as Santander, have big re- pearls branches in big partner countries seems inevitable that Mumbai’s Marine tail operations with large market shares in to help service customers at home. Some Drive will soon be decked with ATM ma- just a few countries where they act like, are also o ering banking services to dia- chines, its joggers will be stabbing mobile- and by and large are treated as, local rms. spora populations in rich countries. banking screens, the rms on the bill- Both these models involve gathering de- The Western banks have found that es- boards will be going on buying sprees posits and operating branches on a large tablishing a light presence in lots of coun- overseas and even the destitute will have scale. The big investment banks are also tries is a great way to lose money. The same some access to nance. Whether emerg- active in emerging economies but may is likely to be true for emerging-market ing-market banks will soon punch their nd the going increasingly tough as local banks, so the smarter rms are trying to de- weight in global banking, let alone domi- banks get better. velop a competitive advantage that they nate it, is another question. 7 The bigger and bigger picture The developing world’s banks are ourishing T HERE is only one thing that is still small about banks in emerging economies: their bosses’ pay packets. The head of Chi- value they now account for almost half the industry’s total worldwide, nearly twice as much as in 2005. That might re ect an ex- pro ts, dividends and Tier-1 capital, listed banks domiciled in emerging markets now account for between 27% and 53% of the na’s ICBC, the world’s biggest bank by cess of optimism, but emerging-market global industry (see chart 1, next page). Chi- market value, received just under $134,000 banks are big by other measures too. Ac- na is responsible for about half of this in 2009, a couple of decimal places shy of cording to Tab Bowers, a consultant at share. Big Western banks’ pro ts from de- his Western counterparts. On all other McKinsey, they account for about a third of veloping countries add up to perhaps a measures these rms are big enough to the industry’s global revenues, matching quarter of the local rms’. make a Wall Street banker reconsider his the emerging countries’ share of world Despite their large size, most emerging- status in the universe. In terms of market GDP. By the most solid measures of all, market banks are not household names in 1
  4. 4. The Economist May 15th 2010 A special report on banking in emerging markets 3 Brazil’s two big private banks are wide- banks in Asia, Africa and Latin America 1 Weight-lifting ly admired. Itaú Unibanco was formed forecast that their loan books will rise by Emerging-market banks as % of global* banks’: through a merger in 2008 which saw it 20-30% annually over the next few years. net income customer deposits overtake Bradesco by size. Both rms are Assuming that Western banks stagnate, dividends loans battle-hardened survivors and have big in- that would mean China’s biggest bank market capitalisation surance, credit-card and investment-bank- would take about two years to reach the Tier-1 capital 114 ing operations. Listed but state-controlled, size of, say, JPMorgan Chase, measured by 60 Banco do Brazil is the country’s biggest - risk-adjusted assets. The biggest banks in 50 nancial rm, with a fth of total assets. It Brazil, Russia and India will take seven to 40 has increased its market share since 2007 ten years. 30 and is looking abroad. The idea that banks are GDP-plus 20 Russia’s banking system is fragmented, businesses has obvious pitfalls. In 2008 with only two giant rms, both state-con- and 2009 the loan books of emerging-mar- 10 trolled. Sberbank controls almost a third ket banks outside China grew relatively 0 of the country’s deposits and has a mixed slowly, at about 10%, although in China 2003 04 05 06 07 08 09 loan book. Its newish management is try- they expanded by about 30%, and the pace Sources: *Based on 150 largest listed banks Bloomberg; worldwide. Chinese banks’ market ing to cut costs and spruce up its business elsewhere will pick up this year. And if company reports; capitalisation included from date of IPO, at home. VTB Bank started as a merchant credit grows too quickly for too long the The Economist fundamental data included from 2003 bank but has gradually built up its branch system tends to explode, as America and presence. About a quarter of its pro ts some other Western countries have found. 2 the West. Most rich-world investors are now come from retail banking. In central and eastern Europe too, 1 aware of China’s big three banks, at or India’s banking system is small but near the top of the global rankings (see ta- growing fast. About three-quarters of the 2 ble 2), but know little about them. Aside industry is in government hands, with the The tops from the Chinese banks, the global top 25 listed but state-controlled State Bank of Emerging-market banks and Western banks include a handful of big Russian and Bra- India commanding about a quarter of the with an emerging-market presence As of April 28th 2010 zilian rms, and lower down there is a long market. It has been revived under the list of smaller banks that together add up watch of O.P. Bhatt, who became chair- Market Global to quite a lot. The average listed rich-coun- man in 2006. ICICI Bank, for a long time Bank cap, $bn rank Country try bank in the top 150 has a market value the pin-up of the private banks, paused for Industrial and 226 1 China of about $36 billion, against $24 billion for breath in 2009, rejigging its strategy to tar- Commercial Bank of China emerging-market rms and just $15 billion get industry as well as India’s burgeoning China Construction 187 2 China if China is excluded. Many are state-con- middle classes. Its veteran boss, K.V. Ka- Bank trolled and most were handsomely pro t- math, became chairman in 2009, with HSBC 176 5 Britain able through the crisis and have good capi- Chanda Kochhar taking over as chief exec- Bank of China 145 7 China tal and funding pro les. Few have much utive. HDFC Bank is still a tiddler by assets Citigroup 126 8 US business overseas. but its market value has shot up, re ecting Santander 98 9 Spain con dence in its domestic strategy and its Itaú Unibanco 84 11 Brazil The numbers game combative chief executive, Aditya Puri. Sberbank 58 20 Russia League tables in banking are dangerous Singapore, Turkey and South Korea also Bradesco 54 24 Brazil things. In 1990 all ten of the world’s largest have banks with market values in the $20 banks by assets were either Japanese or billion range. But perhaps the most notable Standard Chartered 54 25 Britain French. Such things can change quickly. rm outside the BRIC group of countries is Bank of 53 26 China Communications The big emerging-market banks should Standard Bank of South Africa, run by UniCredit 50 29 Italy therefore view their rise with a mixture of Jacko Maree since 1999. Almost a quarter of BBVA 47 32 Spain pride and nervousness. China’s biggest its pro ts come from outside its domestic China Merchants 45 33 China banks are all still state-controlled. ICBC, market, mainly the rest of Africa. It got a big Bank spun out of the People’s Bank of China in boost in 2007 when ICBC bought a 20% Banco do Brasil 42 34 Brazil 1984, is run by Jiang Jianqing, a career bank- stake. A takeover, both parties say, is not on Al Rajhi Bank 33 43 S. Arabia er. It has been making a urry of invest- the cards, but Mr Maree’s business cards State Bank of India 32 44 India ments in Asia and Africa. China Con- are now in both English and Chinese. China CITIC Bank 32 45 China struction Bank (CCB) has its roots in Just how big could such emerging-mar- VTB Bank 27 48 Russia development banking. Its boss is Guo ket banks get? Any self-respecting bank Shanghai Pudong 26 50 China Shuqing, who ran China’s foreign-ex- bull likes to whip out a chart comparing Development Bank change fund before taking CCB public in the ratio of bank loans with GDP in poor DBS Group 25 53 Singapore 2005 in the rst big bank otation. Bank of and rich countries. The poor countries gen- Standard Bank 23 54 S. Africa China has a grand pedigree dating back to erally have much lower ratios. The hope is ICICI Bank 23 55 India 1912. Traditionally China’s foreign-ex- that emerging-market banks will enjoy a China Minsheng 22 57 China change and trade bank, it still has the larg- double bene t. Not only will their econo- Banking est presence abroad. Bank of Communi- mies grow fast but nancial activity will United Overseas Bank 22 58 Singapore cations is the only Shanghai-based big become more intense, allowing banks to Source: Bloomberg rm, in which HSBC holds a 19% share. grow faster than GDP. Today quite a few
  5. 5. 4 A special report on banking in emerging markets The Economist May 15th 2010 2 where loans rose at twice the rate of nomi- nal GDP between 2000 and 2007, they hit a brick wall in 2008 as overextended banks ran out of funding and bad debts mount- ed. In much poorer Nigeria, talked up in 2006 by Mayfair hedge-fund managers as the next great frontier banking market, credit as a share of GDP doubled in about three years to around 30%. With small branch networks and relatively few peo- ple in the formal economy, this was too much. About a third of the system by as- sets is now distressed. The lesson from the Asian crisis of the late 1990s is that systems generally shrink after a blow-up. Credit relative to GDP, then, does not grow in a straight line, thanks to the eco- nomic cycle. But even in the longer term a rising trend is not inevitable. According to rural workers for 100 days a year and to in- Emerging-market companies also pro- Credit Suisse, domestic credit to the private troduce identi cation cards for all could be mise to give the banks lots of new busi- sector credit relative to the economy has a catalyst for the spread of such schemes. ness. This year there will be a boom in been at or falling between 2002 and 2008 Like most bank executives, Mr Kamath ac- loans as they shrug o the downturn. In in China, Mexico, Malaysia, Thailand and cepts that these will not make the industry the longer term banks will have to adapt as the Philippines. And even if borrowing money for quite some time but reckons local capital markets develop and busi- levels are rising in the longer term, banks’ that no bank can a ord not to be there. nesses expand abroad. Most lenders are role in supplying that credit is not assured. Mr Puri, the boss of rival HDFC Bank, says building up investment-banking skills and In America much of the work of nancing that on a ve-year horizon it can absolute- a presence overseas that will generate in- companies is done through capital mar- ly move the needle . come as more local businesses turn to issu- kets. Emerging-market banks may face a But the real boon for many emerging- ing bonds and shares for nance. similar trend. Except in Brazil, most of their market banks has been the rise of a credit And even though all these opportuni- business consists of loans to industry. Fast- culture among the middle classes. Well-o ties still lie ahead, emerging-market banks growing local capital markets could take people behave in a way their parents have already taken a giant leap in size and some of this away. If so, the biggest part of would nd unimaginable, buying homes pro ts in the past decade. They have also the banks’ balance-sheets would actually and cars not by saving up but by borrow- maintained adequate capital ratios and shrink relative to GDP. ing. The ratio of household borrowing to ample deposit funding. The combination GDP points to this in all big developing of growth and strength would appear to Penetrating arguments countries (see chart 3). If the world econ- give them enormous advantages, herald- Yet for all the caveats, emerging-market omy rebalances so that surplus countries ing a rebalancing of power in global - banks can count on vast untapped de- save less and consume more, mortgages nance. Yet are those rock-solid balance- mand. McKinsey estimates that most peo- and consumer loans will become the sheets quite what they seem? 7 ple in Latin America, Asia and Africa lack banks’ biggest source of pro ts. access to formal banking services. Slowly Although competition may put pres- the supply is catching up. Bradesco in Bra- sure on emerging-market banks’ high mar- 3 Modest borrowers zil has recently opened the world’s rst gins, there are o setting factors. People will Debt as % of GDP Households oating bank branch (which sails down shift their savings from deposits to invest- Companies the Solimões River in Amazonas) and the ment products with better yields that 0 50 100 150 200 250 rst branch in Heliópolis, a big favela banks can charge fees for. Low-cost tech- Russia 2000 (slum) in São Paulo. State Bank of India has nology too could boost pro ts. India’s 2008 more than doubled its number of ATMs banks say they have leapfrogged the ex- 2000 India since March 2008 without seeing a decline pensive mainframe computers of their 2008 in transactions per machine per day, cur- Western peers and expect a rapid move to- 2000 China rently about 300. Most banks are trying to wards mobile-phone banking among the 2008 reach the unbanked . This is partly a young. In China people do not use 2000 question of technology for example, pro- cheques but can get text-message con r- Brazil 2008 viding biometric identity cards for illiterate mations when they have used their credit 2000 people without papers. It is also a question cards, reducing the risk of fraud. Noel Gor- Germany Q2 09 of organisation. Mr Kamath, the chairman don, a consultant at Accenture, jokes that 2000 of ICICI, India’s biggest private bank, is when Western banks were ddling with Spain Q2 09 thinking about appointing an agent in rocket-science nance, emerging-market United 2000 each village who would be given the kit to banks were innovating more productively States Q2 09 link up with the bank’s system. Indian gov- by opening up entire new markets that will Source: McKinsey Global Institute ernment schemes to guarantee work for make sustainable pro ts.
  6. 6. The Economist May 15th 2010 A special report on banking in emerging markets 5 Rambo in cu s Balance-sheets are less powerful than they look W ESTERN bank bosses often suspend their critical faculties when discuss- ing their emerging-market peers. Suddenly symmetry to the gures that is not entirely coincidental. In 2008 the surplus of cus- tomer deposits over loans (ie, excess sav- Mirror image Banks’ excess of deposits over loans*, $trn 4 it is not the next quarter that matters but ings) at listed emerging-markets banks was the long-term ow of world historical about $1.6 trillion, compared with a de cit Developed world Emerging markets forces. They think about time in a very of about $1.9 trillion at rich-world banks 2 di erent way, says one, Zen-like, before (see chart 4). The imbalances of the world’s adding: History always follows a course. economies are re ected by their banks. 1 What lies behind this mumbo-jumbo is A Western bank with masses of excess + the recognition that emerging-market funding would be deemed to have a huge 0 banks are not just getting bigger but also competitive advantage. Surely the same – have piles of excess deposits because they applies to entire countries’ banking sys- are based in countries with high levels of tems? Emerging-market banks could use 1 savings. This would appear to give them a their surplus funds beyond their borders, decisive advantage over Western banks for example by lending directly to foreign- 2 that rely on ckle borrowing markets to do ers and taking market share from rich- 2003 04 05 06 07 08 09 business. To add to rich-world banks’ dis- country rms. By doing so they would be Sources: Bloomberg; company *Top 150 listed reports; The Economist banks worldwide comfort, developing-world banks tend to bypassing central banks and sovereign- have high capital ratios too. In banking, es- wealth funds, recycling excess savings di- pecially after the crisis, whoever has the rectly themselves. But this is not what hap- gathered more deposits in Hong Kong than deposits and the capital usually wins. pens. For a start, the funding position of it lends out. In 2002 it bought a mirror im- The reality is a bit more complicated emerging-market banks is less impressive age of itself, Household, an American con- than that. Banks are indeed mirrors of the if China is excluded. And even in markets sumer- nance rm with $106 billion of economy, so banks’ balance-sheets re ect with excess savings these are not always loans and no deposits. It announced at the the fact that the typical Westerner is a bor- evenly distributed, with a lot of them stuck time that it was bringing together one of rower and the typical Asian a saver. Emerg- in sleepy state banks. Some rms are doing the world’s top asset-generators with one ing-market banks tend to have vast branch their best to change that: ICICI’s Ms Koch- of the world’s top deposit-gatherers . networks that suck in deposits from thrifty har, for example, is setting up lots of new Those labels could be applied respectively families and companies. Only some of branches to boost its deposits. to America’s and greater China’s entire these get lent out again. Banks park the sur- Banks that do gather excess deposits banking systems. plus with the state, by buying government may nd the government wants to get its The acquisition failed because of bad bonds or keeping it in central banks. The hands on them. This could be for pruden- debts at Household, but the original pre- state in turn acts as the international recy- tial reasons. For example, China’s regula- mise was wrong too. HSBC’s regulators, cling agent for those excess savings: it lends tor requires banks to keep 17% of their de- like most around the world, did not want them to Western countries through its for- posits with the central bank and tinkers deposits in one country to be used to - eign reserves or through a sovereign- with this ratio to control the economy. Or it nance a subsidiary overseas, exposing the wealth fund, for example by buying US could be because the government needs bank to foreign-exchange and counter- Treasuries, mortgage bonds or money- the cash. In India banks are obliged to use party risk. Michael Geoghegan, HSBC’s market instruments. about a quarter of their deposits to buy chief executive, says it might have found Overextended Western banks do the government debt, which helps the govern- ddly ways of getting Asian customers to exact opposite: they borrow from capital ment fund its budget de cit. Mr Bhatt of fund Household, perhaps by securitising markets to plug the hole created by having State Bank of India says there is little Household’s loans and selling them to more loans than deposits. This shows up chance that this will change soon: It is the HSBC’s Hong Kong subsidiary; but the in the ratio of loans to deposits, which for model in this country, and allows the gov- bank chose not to do so because it felt that rich-country banks rose to alarming ernment to spend on development. would disadvantage its Hong Kong deposi- heights in the run-up to the crisis (though tors. He says the regulatory climate has got they have since come down somewhat), So complementary and yet so far more di cult since the crisis, and it’s get- whereas those for emerging-market banks But suppose that when everything is said ting harder to move liquidity around remained healthier. and done banks still have piles of excess among subsidiaries. Another way of measuring the di er- deposits? This is broadly true of China’s For the moment China’s banks show ences is to look at the absolute funding lenders. Can they nd a way to marry their little appetite for taking positions in risky gaps. Although by and large rich and poor savings-rich rms with the indebted Western assets. Bank of China did boost its countries’ banks are not lending to, or bor- equivalents of the West? There is already a foreign-currency lending in 2009 by a rowing from, each other directly, there is a real-life case study: HSBC. It has always stonking 47% to about $200 billion, or 1
  7. 7. 6 A special report on banking in emerging markets The Economist May 15th 2010 2 about a quarter of its loan book, but this the downturn. But in both India and China to set aside to support new loans. And al- was matched by $190-odd billion of for- the position is less clear-cut. Indian banks though emerging-market banks generate eign-currency deposits. The bank actually have lowish levels of non-performing decent returns on equity, in aggregate they reduced its holdings of foreign-currency loans but have built up relatively small re- pay out about a third of that in dividends, securities by an eighth, in accordance serves against them. These reserves act as limiting the amount that is retained and with the global nancial-market situa- a bu er against losses before capital is eat- added to their capital bases. tion a polite way of saying in order to en into. Adjusting for that could knock a avoid dud Western assets. Its latest annual percentage point or so o Indian banks’ Less than meets the eye report notes growing concerns over the capital ratios. The maths of this can be pretty eye-water- nances of southern European banks and China’s banks seem to have lots of re- ing. Assume that emerging-market banks governments. serves relative to the current level of non- really increased their risk-adjusted assets performing loans, but that level seems im- at, say, 20% a year yet maintained the same Deposits don’t travel plausibly low given how much they have return on those assets, capital ratios and There are other ways of utilising excess de- been lending. Bad-debt reserves relative to dividend payout ratios as they had last posits abroad, says Anthony Stevens, a the size of total loans are smaller, especial- year. To back new assets, such as loans, consultant at Oliver Wyman. The most ob- ly compared with Western rms that have they would need $4 trillion of new capital vious ones are hedging, organising swap taken massive hits in anticipation of over the next ten years, only $2.6 trillion of lines with foreign banks and encouraging losses. For example, Bank of China has which would come from retained pro ts. domestic customers to switch their depos- roughly the same size of loan book as They would need to raise $1.4 trillion from its into foreign currency, thereby making JPMorgan Chase or Citigroup, but only external sources about one-and-a-half them take the exchange-rate risk. But none around half the level of bad-debt reserves. times the total capital America’s 19 biggest of these are large-scale options in coun- Still, assume the best: that after a lend- banks had at the end of 2008. Even assum- tries with partially closed capital accounts. ing boom of several years, bad debts at ing growth of 15%, the shortfall would be And in China in particular, given the un- emerging-market banks are under control. some $400 billion. One option would be dervaluation of the renminbi, the last Surely, then, with their high pro tability, to cut dividends, but neither private nor thing policymakers want is banks whose they should be throwing o plenty of ex- public shareholders would like that. asset bases would fall as the currency ap- cess capital? Not necessarily, for the faster At the same time Western banks are ac- preciated. Far better for the currency risk to they grow, the more capital they will need tually likely to release capital as they wind be borne by the central bank and sover- down bad assets. Royal Bank of Scotland eign-wealth funds. In the medium term, as has about $30 billion tied up in its bad customers spend more and save less, the bank but will probably have to use that to pool of excess cash in emerging-market repay emergency aid from the state, its cur- banks may shrink. Until then it will be rent majority owner. Still, banks that have hard to use that strength abroad. either largely paid back the government, What about the emerging-market such as Citi, or never accepted aid, such as banks’ capital positions? At the end of HSBC, could eventually have capital com- 2009 these banks had a weighted-average ing out of their ears. Vikram Pandit, Citi’s Tier-1 capital ratio of 10%, in line with rich- boss, recently told investors that nobody world banks, but this probably under- wants to talk about excess capital, but at states their advantage. Excluding China’s some point down the road we’re going to banks (which have been busy raising equ- have to gure out what to do with it. ity since), the ratio was 12%. And the new The balance-sheets of emerging-market capital rules known as Basel 3 are likely and rich-world banks are like the coasts of to be much less painful for emerging-mar- America and Africa: they look like a good ket banks, which typically have higher- t. One group of lenders is overloaded quality capital and smaller investment- with excess deposits but in need of capital, banking units (which will be heavily pe- the other is short of deposits but likely to nalised by the new rules) than their rich- generate capital. It would seem like a tem- world peers. At the same time they are like- plate for much closer integration, but ly to be more pro table than banks in bringing the two groups of banks together Europe and America, which will allow might be as di cult as melding continents. them to create new capital faster. That partly re ects the problems emerg- Even so, emerging-market banks will ing-market banks face in shifting excess still be short of capital. That is partly be- funds into foreign-currency assets, or cause of bad debts. In most places the cycle among subsidiaries in di erent countries. has already turned for the better. In Brazil But most emerging economies now also Bradesco has said that the worst is over. have less appetite than they did for letting Sizwe Nxasana, chief executive of First- foreigners in, and much more for state in- Rand, one of South Africa’s big four banks, volvement in banking. And far from being notes that impairments are falling o and ready to take on the globe, most emerging- the performance of loans to lower-income market bankers are consumed by their co- customers has been very good during lossal and growing businesses at home. 7
  8. 8. The Economist May 15th 2010 A special report on banking in emerging markets 7 Domestic duties CCB, China’s second-biggest bank, exempli es the size of the task at home I T IS something of a surprise to nd that the bank boss with the best line in dead- pan humour is Guo Shuqing, chairman of which accounted for perhaps a third of the new loans. These projects often su er from poor cash ow, no explicit guarantee from its plans but it is likely to issue new equity too. Agricultural Bank of China, a giant fully state-owned lender, is considering China Construction Bank (CCB). When it the state and limited transparency. oating a minority of its shares on the oated in Hong Kong in 2005 Mr Guo re- Mr Guo is optimistic about bad debts in Shanghai and Hong Kong stockmarkets minded the assembled ranks of slick in- the banking system overall. If we deal this year. vestment bankers and analysts that during cautiously with this risk we will have a soft China’s banks have a lot on their plates the Cultural Revolution he had been a landing, he says. However, he also cau- right now, thanks to the lending surge of cowboy. Five years on the bank has risen to tions that there is no blanket guarantee for the past two years. But even in the medium be the world’s second-largest by market local infrastructure projects: Not all can term the industry is likely to be quite a value, after ICBC. Over that period its pro- be rescued by the central government. challenge to manage. Part of this relates to ts have more than doubled to $16 billion, The key, he reckons, is to improve the ow capital. This year, for example, the govern- more than at any of America’s three most of cash to local authorities, which itself re- ment is still aiming for lending growth of pro table banks, JPMorgan, Wells Fargo quires further reforms. The cap on the about 19%. At the same time China’s banks and Goldman Sachs. amount of bonds the central government are paying hefty dividends, limiting the CCB embodies the paradox of many issues on their behalf needs to be raised. amount of capital they generate internally. emerging-market banks. It is huge and has But China also needs to open the front Mr Guo at CCB, which paid out 44% of pro- grown phenomenally quickly, but the de- door by allowing local governments to ts last year, explains that according to in- mands placed on it at home are also huge. raise municipal bonds. At the same time ternational practice the ratio should be Last year it expanded its loan book by 27%. the government can enlist the help of Chi- about 30%. But an absolute dividend cut The industry as a whole grew even faster, na’s remaining fully state-owned banks, is unlikely because Huijin, the state vehicle by 32%, partly thanks to the leading role the although their role needs to be de ned that owns stakes in the banks, needs the in- banks played in the government’s eco- clearly to avoid moral hazard. The same come to pay interest on the funds it spent nomic stimulus. New loans made in China goes for the plethora of smaller local banks recapitalising China’s banks back in 2003. were equivalent to almost a third of GDP. that can be encouraged to provide more Although the planned capital-raising may Roy Ramos, an analyst at Goldman Sachs, credit to local projects but must, he says, re- dilute Huijin’s stake, currently at 57%, the points out that in less than ten months Chi- main independent institutions . government has got some room , Mr Guo na added the equivalent of India’s banking says, to maintain a majority shareholding. industry twice over. Hungry for capital Other banks agree that more capital The government is now working hard China’s banks are highly pro table, which will be required over time. Yang Kaisheng, to ensure that the lending spree does not gives them a bu er to absorb potential the president of ICBC, said recently that cause a bad-debt problem that infects the losses. Still, in response to the rapid growth the big four banks could need $70 billion banks (which it had to recapitalise just un- in loans and the risk of bad debts, the of outside capital over the next ve years der a decade ago). In April Liu Mingkang, banks are also busy raising capital. Bank of about double the maximum they have in- the top banking regulator, said he had China, Bank of Communications and dicated they might raise now. This was as- asked the banks to submit comprehen- ICBC have indicated that between them suming loan growth of 15% a year. At some sive reviews of their loan books by June. they will issue up to $28 billion-worth of point the state will need to inject more cap- Of particular concern are the infrastruc- new securities, bolstering their core capital ital into the banks or permit them to cut ture projects backed by local governments, by about a seventh. CCB has yet to nalise their dividend payouts. The third option, 1
  9. 9. 8 A special report on banking in emerging markets The Economist May 15th 2010 2 of allowing its stake to be diluted below one of the biggest and fastest nancial politicians and regulators have been very 50%, looks unlikely, and the fourth, of de- transformations ever seen. If they do not, nervous about Chinese lenders taking big veloping a shadow banking system into the result may be one of the world’s bigger stakes in their banks, but adds that the cri- which the banks can o oad assets, seems nancial headaches. There is little inclina- sis may have changed this a little. In any less attractive after the debacle in Ameri- tion to allow a sudden in ux of foreign case, Western economies are overbanked, ca’s securitisation markets. banks that might make the system less sta- suggesting limited growth potential. It is not just the capital bases of China’s ble. Chinese banking has interacted with In mirror image, the in uence of for- banks that will have to adapt to continued the outside world cautiously, lagging the eign rms in China is likely to be limited. expansion. The system already has all the expansion of China’s big industrial rms. Western banks, Mr Guo says, don’t have regional complexity of America, from Hai- Bank of China last year generated 22% of many opportunities to build enough nan Island, a Florida-style property-devel- its pre-tax pro ts outside mainland China branches to rival the vast networks of the opment hotspot, to pockets of conserva- but most of this was from Hong Kong and big domestic banks. Through their minor- tism such as Zhejiang Province, just south Macau. ICBC, which has shown the most ity stakes in Chinese banks Western rms of Shanghai. And notwithstanding the expansionist instincts, derived only 4% of get all the exposure to China they need. heavy infrastructure lending of the past pro ts from abroad. In some respects China’s template for two years, the mix of the banks’ lending banking seems rather conservative. It en- will shift. Today only a fth of all loans are No adventures visages a stable industry structure, with to households. But as saving declines, con- Mr Guo, for his part, advocates caution limited entry for Western newcomers, a sumer lending, including mortgages, will abroad. Using domestic deposits to fund high degree of government co-ordination become more important. At the same time purchases of foreign assets involves too and a cautious view of banks going rapidly developing capital markets will of- much risk: If the currency were to appre- abroad. Yet at the same time it is dynamic, fer big companies an alternative way to ciate, how would we pay it back? CCB with vigorous competition among domes- raise money and put pressure on banks’ made 1% of its pro ts from abroad last year tic banks, big shifts in the pattern of lend- lending margins. Mr Guo reckons that but the idea of boosting this by buying ing, plenty of product innovation and, lending to consumers and small rms equity stakes in foreign banks is not entic- most important of all, fast credit growth. could rise to 40% of CCB’s loan book with- ing: We don’t want to do that very This kind of managed nance model is in ve years, from about a quarter today. much we want to establish a network no longer con ned to China. Since the cri- If China’s banking system and its capi- abroad for our customers but their require- sis a milder version of it has gained fans all tal markets develop as planned, it will be ments are limited. Mr Guo says Western over the emerging world. 7 Mutually assured existence Public and private banks have reached a modus vivendi I NDIA is where China was ten years back, says Mr Kamath, chairman of ICICI. That is certainly true by size. India’s the collapse of Lehman Brothers, a liquid- ity squeeze and a notable shift in deposits. At ICICI overall deposits, as well as the Looking for the right mix Banking sector, % ownership of total assets, 2009 5 GDP amounts to about a quarter of Chi- stickier category of savings and current-ac- State Private Foreign na’s today and its banking industry just a count deposits, dropped by about a tenth tenth. But in at least one respect India is between June and December 2008. Savers 0 20 40 60 80 100 well ahead: it has several dynamic private- shifted their cash to the government-con- China ly owned banks that over the past decade trolled banks, which were perceived to be India* have taken a fth or so of the market from safer. Money was pouring out of our Russia the state-controlled banks. Until the nan- ears, says Mr Bhatt of State Bank of India. Brazil cial crisis in the West the private banks That experience has helped prompt a Poland† seemed to o er a template for the entire in- change of strategy at ICICI, which for a dustry: within a decade or two, it seemed, long time was one of the most admired Mexico the state would retreat signi cantly. Now private banks in the developing world. Sources: Central banks and *Loans, September 2009 †2008 regulators; Raiffeisen; Andrei Vernikov India’s mixed model of banking is likely to After a decade of spectacular growth, fu- persist for longer. elled in part by wholesale funding (includ- Part of that re ects the fact that India ing bulk deposits), the bank recently posits because as interest rates rise these had its own wobble during 2008. This was slammed on the brakes. In 2009 its loan should be cheaper as well as stickier than not a full-blown crisis; indeed, Aditya Puri, book shrank by 17%. wholesale funds. Current and savings de- chief executive of HDFC Bank, the second- Chanda Kochhar (one of several female posits now make up 42% of total deposits, biggest (and perkiest) private rm, says to bank bosses in India), who took over as up from 27% before the crisis. Private banks describe it that way would be an appall- chief executive from Mr Kamath last year, so far lack the state banks’ huge branch net- ing misconception . But there was a sharp says that the bank decided to focus on works, but they are working on it. ICICI spike in money-market interest rates after changing its funding mix towards retail de- now has 2,000 branches, against only 755 1
  10. 10. The Economist May 15th 2010 A special report on banking in emerging markets 9 Western regulators too are considering gos Abreu, chief nancial o cer of Bra- 6 State good, foreign bad pushing up liquidity levels. Indian bankers desco, says the state banks had a very im- Banks’ gross credit in India joke that all the ddly rules they face have portant role in the government’s anti- % change on a year earlier become the envy of regulators throughout cyclical policies , adding that in a Regional rural banks Nationalised banks the world. downturn it makes a di erence to have a State Bank of India Other commercial All this has led to a reappraisal of mixture of state, private and foreign banks. Foreign banks banks 40 whether state banks should be fully priva- He concedes that two years ago he might tised in the long term. HDFC Bank’s Mr have answered the question di erently, 30 Puri says that the world has changed and but now he had to acknowledge that the 20 the view around here has changed. Mr state banks have their merits. 10 Kamath takes a similar view, predicting Alfredo Sáenz, chief executive of San- + that in the new circumstances India’s evo- tander, which owns the country’s third- 0 – lution will be more or less in line with Chi- biggest private lender, quips that Brazil 10 na’s. Mr Bhatt reckons there will be no keeps an artistic equilibrium between 20 big-bang reform and that over time the the private and the public sectors. Persio Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 state-controlled banks’ share will drop Arida, a former governor of the central 2007 08 09 only gently, to 55-65% of the market. bank and president of BNDES, and now a Source: Reserve Bank of India A similar message is heard in Brazil. In partner at BTG Pactual, Brazil’s leading in- the past ve years Brazilian private banks dependent investment bank, says that the 2 in early 2007. That should help it suck in have risen to global signi cance, helped by consensus in the country is that the state more deposits. a frenetic 2007 and 2008 when an eighth banks played a vital role. However, he cau- The state banks may hold on for a while of the system’s assets changed hands. Itaú tions that until the extent of bad debts yet to the market share they have taken. Be- bought Unibanco and Santander bought created by their lending is known, no de- tween June 2007 and December 2009, ABN amro’s Brazilian business. nitive judgment can be reached. after a long period of genteel decline, they But just as important has been the ex- saw their share of total deposits and loans pansion of the state banks, Banco do Brasil Russia holds the line rise from 73% to 77%. After years of erce (a listed commercial lender with a bias to- In Russia up to 54% of the system’s assets competition from the private banks, they wards agriculture), Caixa Econômica Fed- are state-controlled, according to Andrei have begun to get their act together. At eral (a mortgage specialist) and BNDES Vernikov, an economist, compared with State Bank of India’s headquarters in (which acts more as an investment com- 45% in 2007. Foreign banks’ share stands at Mumbai visitors may still receive a smart pany). Together their share of the nancial 18%. The balance-sheets of the three Euro- salute from a man in uniform, but, Mr system’s assets has reversed its earlier de- pean banks that are most active in Russia, Bhatt says, its technology and products are cline and now stands at 42% (see chart 7). UniCredit, Rai eisen International and So- now comparable to the private sector . Part of their increase in market share re- ciété Générale, together shrank by about a Mr Kamath agrees that the state banks ects acquisitions, with Banco do Brasil quarter in euro terms in 2009. Royal Bank have caught up on technology. buying Nossa Caixa, a mid-sized state- of Scotland’s loans to Russian corporate owned rm, in 2008 and a 50% stake in customers dropped by 45% in sterling Learning to love state banks Votorantim, a car- nance specialist, in terms. Net loans at state-controlled Sber- Yet even if the private banks do go back on 2009. But about two-thirds of the rise has bank and VTB declined by only 4% and 10% the attack, attitudes towards the state-con- come from lending more than the private respectively in local-currency terms. Last trolled banks have changed for good. After rms during the downturn. summer the government took a larger all, they were the ones that continued to That in turn has changed people’s stake in VTB to bring its holding up to 86%. supply credit to the economy during the views of a mixed nancial system. Domin- Andrew Keeley, an analyst at Troika Dia- downturn. Before the crisis all banks were log, an investment bank, says that al- expanding their loan books at an annual though the government is likely to sell the 7 rate of about 25% (see chart 6). After State banks can dance too additional stake in VTB again, it intends to mid-2008 there was a big divergence, with Brazilian financial system’s assets, % of total keep majority control of both big banks. the state banks (which come in three main Big three state- Itaú Bradesco But none of this means that a Soviet- avours: the nationalised banks, State controlled firms* Unibanco style banking system is about to emerge in Santander HSBC Citigroup Bank of India and the regional rural banks) any of these countries. In China the gov- 50 keeping credit growing fairly steadily. The ernment did take control of credit during private banks more or less ground to a halt. 40 the crisis, but for other state banks it was The foreign banks went from expansion to more of a nudge and a wink. Mr Bhatt says sharp decline, with their share of loans 30 he was left to his own devices. Most gov- dropping from a peak of 7% to a paltry 5.3% ernments also want private-sector banks last December. 20 to raise the level of competition. Even in Most bank executives now also con- 10 China the state accepts some innovative cede that old-fashioned regulation was upstarts, such as China Merchants Bank, a shown to have its merits. Indian banks are 0 mid-sized bank with di use ownership required to hold a big slug of their assets 2004 05 06 07 08 09 and no direct state control. And all emerg- (typically just under a third) in govern- Source: Banco *Banco do Brasil, BNDES and CEF; ing markets want some foreign banks in or- Central do Brasil includes 100% of Votorantim in 2009 ment bonds and at the central bank. Now der to keep local rms on their toes. 1
  11. 11. 10 A special report on banking in emerging markets The Economist May 15th 2010 2 So although the ratio of ingredients va- tion about the performance of the bank. chairman, Mr Bhatt, says it is still an open ries, the objective mostly seems to be a mix But governments seem determined to hold question whether the state might breach with a strong state presence. This is seen as on to a stake of at least 51%. For example, the 50% threshold in the medium term, but more responsive to businesses, less vul- Banco do Brasil, now the country’s largest even then it would seek to have a big nerable to aky foreigners and more open lender by assets, announced plans to raise enough stake to remain the dominant to soft control by the state as it tries to $5 billion earlier this year, but its objective shareholder. Many governments are in manage the economic cycle. Western remains the maintenance of the govern- better scal condition than India’s and bankers see its merits too: HSBC’s Mr ment’s shareholding control . Turkey is have more scope to top up banks’ capital. Geoghegan, a veteran of banking in Latin thinking about oating its largest lender, Emerging-market banks’ hunger for America, the Middle East and Asia, reck- Ziraat Bank, but the state seems likely to re- capital used to ensure that they would ulti- ons that a healthy combination of foreign tain control. It is the same story in China, mately be sold o to the market or to for- and local rms leaves foreign banks politi- says Bill Stacey, an analyst at Aviate Global, eigners. Not any more. So the prospect cally less exposed. a brokerage rm. The government is happy now is of a fast-growing, innovative bank- to sell shares in banks but wants to keep a ing industry that remains subject to con- Control freaks majority stake. Likewise, in Russia the state servative regulation and only gradual The problem for state banks is that they wants to retain control of the two biggest shifts in control. After the West’s experi- need to nd a way of raising capital with- banks. ence with no-holds-barred banking, that out diluting the government’s holding. What happens when the state’s hold- may be a good idea. But for growth-starved Most state-controlled banks are listed be- ing gets close to that crucial 50%? State Western banks desperate to do business in cause a quotation brings market discipline Bank of India expects to receive a capital emerging markets it means they will nd it to managers and provides useful informa- injection from the government this year. Its even harder to get in. 7 We lucky few For Western rms the barriers to entry into emerging-market banking are daunting Y OU kind of needed to think about this 30 years ago, says Stuart Gulli- ver, who runs HSBC’s investment bank, in China, it advised shareholders that matters are progressing favourably in Shanghai a message banks still intone. time from the 1970s to the early 2000s, with an expansion in America, a failed at- tempt to buy one British bank, a hostile bid when asked about Western banks expand- The network banks have been through from another, then the Asian crisis and a ing in emerging markets. He has a point. a few twists and turns. For its rst 85 years bout of boardroom bloodletting. Citigroup There are only two kinds of Western HSBC concentrated on Asia, although it re- has spent the past decade trying to be a - banks that are big in developing countries, tained a presence in London. From 1949 it nancial supermarket. and both have been at it for quite a while. adjusted to the revolution in China and The crisis has cleared their minds. Citi- The rst are the global network banks consolidated in India, Hong Kong and the group, notes its Indian-born boss, Vikram which have a limited presence in lots of Middle East. After 1978 it started to expand Pandit, is going back to the core model of countries which they use to tap interna- mainly in rich countries, which led to the what we had as a global bank . After the tionally minded companies and consum- purchase of Britain’s Midland Bank in 1992 bail-out Citi realised that it was the emerg- ers: Citigroup, HSBC and Standard Char- and the shift of its headquarters to London, ing markets that made us very special, he tered. The second are the lenders that have and in 2003 to the ill-fated takeover of says, and that the dealmaking of the past gone native with a deep retail presence, America’s Household. decade had diverted a lot of energy away most notably Santander and BBVA in Latin Standard Chartered had a turbulent from the rm’s strengths. Shirish Apte and 1 America and UniCredit in eastern Europe. These six rms certainly pack a punch, 8 with nearly $30 billion of pro ts from de- In foreign fields veloping countries in 2009 (see chart 8), Western banks’ net income in emerging markets about a quarter of what listed local banks 2009, $bn of which made. But replicating the gone native Emerging Hong Stakes in Latin Central Europe Africa & Group banks has become next to impossible (see Bank markets Asia Kong China America & Russia Middle East profit/loss next article). And even the network banks HSBC 9 8 4 2 1 0 <1 6 have historical advantages that make it Citigroup 7 4 na na 2 na na -2 hard to emulate them. By the end of the Santander 5 0 0 0 5 0 0 12 19th century HSBC was already big in Asia Standard Chartered 3 3 1 0 0 0 <1 3 and Standard Chartered’s predecessor BBVA 3 0 0 0 3 0 0 6 rms were doing well in Africa and India. UniCredit 2 0 0 0 0 2 0 2 Citigroup’s main constituent part, Interna- Total 29 15 5 2 12 2 1 28 tional Banking Corporation, was founded Sources: Company reports; The Economist estimates in 1901. A year later, with an agent installed
  12. 12. The Economist May 15th 2010 A special report on banking in emerging markets 11 2 Stephen Bird, joint bosses of Citi’s busi- ness in Asia, say it has been largely un- touched by the turmoil in New York. One rival in the region says Citi’s business is brilliant . That resilience has echoes in history. When President Roosevelt closed America’s banks in March 1933 to try to halt a meltdown, the bank’s overseas deposit base shrank by just 2%. America’s other large commercial banks came late to the party. Because of regulatory quirks most did not go overseas until the 1960s, and despite the huge ad- vantage of their customer base at home few were able to maintain the global pres- ence they had aspired to. HSBC’s Mr Geoghegan moved to Hong Kong in early 2010. His perks include a house on a leafy lane on top of the island and a huge o ce in one of the city’s most iconic buildings. He says emerging mar- kets are about volatility , something only the biggest and most experienced rms can handle. HSBC’s rethink began in 2006 when it abandoned its e orts to turn its in- and their relationship with corporate cus- tional process that saw the bank expand vestment bank into a bulge-bracket con- tomers which is based, in an oft-repeated over a century. tender and shifted its attention to develop- formulation, more local than other inter- Have the network banks been able to ing economies. The blow-up at national banks and more international translate their unique advantages into pro- Household, which HSBC is now winding than the local banks. Although this is of- ts? After all, ABN AMRO’s giant global down, gave impetus to this move. After an ten mocked by rivals as a way of dressing presence became a liability when it pro- $18 billion rights issue in 2009 it has landed up small market shares in many countries, duced too little revenue to cover its costs. on its feet. Its structure, with a surplus of the case for geographic reach is getting That helps to explain why all three banks deposits and its local operations ring- stronger as emerging markets trade more developed consumer-banking businesses. fenced as subsidiaries, is a regulator’s with each other and the number of multi- Citi has been trying to attract well-o retail dream. And at a time when emerging national companies grows. Citigroup says customers since 1976, but has not always countries increasingly do business with clients that bank with it in 70 or more succeeded. Its Latin American credit-card each other, being everywhere turns out to countries spend twice as much as those business lost money last year and its cred- be pretty useful. that bank with it in 50-60 countries. it-card loans of $18 billion in Asia generat- Standard Chartered has concentrated HSBC’s Mr Gulliver says that to win cor- ed pro ts of just $214m. Jonathan Larsen, mainly on emerging markets for two de- porate customers in emerging markets, who heads its consumer business in Asia, cades but has recently changed its ap- you have to have a substantial presence in says bad debts are improving and Citi en- proach. When Mervyn Davies was chief the developed world and the ability to joys an extraordinary brand awareness executive in 2002, he said the consumer lend on a substantial scale something few that can be tapped. Urbanisation helps: the business would be our engine for other rms can o er. top 85 cities in emerging markets generate growth . In fact the horsepower has come 10% of global GDP, so a small branch net- from wholesale banking, which now pro- In praise of plumbing work can make a big di erence. Mr Pandit vides 80% of pro ts, up from 60% seven All three banks also own bits of the global says the business is there to stay. years ago. Peter Sands, who became chief nancial plumbing that governments, HSBC is sticking with well-o custom- executive in 2006, may have re ned companies and other banks need to ship ers but has gone o mass-market consum- tastes during an interview with your cor- funds around the world. That gets a foot in er nance. Mr Geoghegan notes that in de- respondent he received a note from his pi- clients’ door and generates a slab of stable veloping countries it is quite easy to lend ano tuner but his message to share- pro ts and deposits. Some other banks, in- and much harder to collect. Instead HSBC holders last year was anything but subtle: cluding Deutsche Bank, JPMorgan Chase is bulking up, for example with a small Our role and position in the world of and Royal Bank of Scotland, have big tran- deal in Indonesia recently that solved our banks have changed dramatically. We did saction-services divisions, but about half problem of too few deposits. Critics point not just weather the crisis, we turned it to of their revenue comes from their home out that almost half the bank’s $11 billion our advantage. markets. In terms of pro ts from emerging of pre-tax pro ts from emerging markets in When the network banks have strayed markets, the three network banks’ transac- 2009 came from mature Hong Kong and too far from their core businesses for ex- tion-services units are much larger. Repli- $1.5 billion from minority stakes in Chinese ample in consumer nance their record cating Citi’s operation, Mr Pandit says, rms. Yet many banks would love to be so has been patchy. Their backbone is the in- would be a very, very di cult thing to do well placed in China. In theory HSBC has ternational presence built up over decades because you’ve got to follow the genera- the right to increase its stake in BoCom to 1