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Emerging markets-based banks seize opportunities in developed, developing markets for global expansion

Bank M&A transactions set to outpace GDP growth in emerging markets

Singapore—3 June 2014, World trade flows, increased gross domestic product (GDP), a growing middle class and new technologies will help emerging markets-based banks expand into developed markets in the coming year. According to the report Banking across borders: International expansion opportunities for emerging markets-based banks released by Deloitte Touche Tohmatsu Limited (Deloitte Global), experience of operating in volatile markets, combined with their knowledge of how to reach unbanked and under banked customers, better position emerging markets-based banks for successful global expansion to developed and other emerging markets.

The report also outlines steps emerging markets-based banks will need to take to expand internationally. This includes factoring in readiness for expansion, lessons learned from expansion from previous decades and potential challenges such as language, culture, talent, regulation, and capital needed to extend their brands into new markets.

“The banking systems in many emerging markets were less impacted by the financial crisis resulting in strong balance sheets,” said Jim Reichbach, Deloitte Global Leader, Banking & Securities. “This relative strength allows these banks to invest in growth opportunities and many are now leveraging their strengths and their operating knowledge and are looking to expand into new markets.”

In fact, the World Bank notes that acquisitions from emerging markets to be on the rise, projecting the annual value of cross- border M&A transactions to double by 2025, outpacing the underlying GDP growth rates in emerging-market firms’ home countries.1

“Emerging markets-based banks often have limited domestic expansion opportunities,” added Reichbach. “Accordingly these banks are looking at international opportunities, including M&A transactions, as their customers expand into new markets and their citizens immigrate to new countries.”

According to Deloitte Southeast Asia’s Financial Services Industry Leader, Ho Kok Yong, there are challenges amid optimism for banking in Southeast Asia. “The weakened economies of the United States and Europe, traditional trading partners with Asia, have led countries in Southeast Asia to look for market opportunities closer to home. Heavy regulations of the banking system in countries like Singapore, Indonesia, Thailand and Vietnam have led to increased competitiveness with high banking penetration in second-tier cities.”

Today, emerging markets and developed markets each account for half of the world’s GDP.2 However, in the future, the report projects emerging markets to account for more of the global GDP with developed markets accounting for less. Additionally, according to the Fortune Global 500 list the number of North American and European financial services firms on their list has declined, while the number of those based in Asia, Central and Latin America has risen.3

According to the report, the key steps emerging markets-based banks can take toward expansion into developed and developing markets, while assessing their readiness along the way, include:

  • Strategy: Understand what market segments to pursue. According to a recent study published by the World Economic Forum, three areas afford the greatest opportunities in emerging markets – consumer financial services, small and medium enterprises, and corporate.4
  • Execution: After defining a clear strategy for international expansion, emerging markets-based banks should focus on how they intend to implement their plans.
  • Infrastructure: Have adequate technology and business systems. In some emerging markets, infrastructure resources — ranging from reliable transportation to sources of electricity — are scarce or limited.
  • Talent: Human resources is one of the most critical resources that emerging markets-based banks will need when expanding: people who understand the culture, language, and business practices in emerging markets. A bank with a reputation for growth and the ability to offer international assignments is more likely to attract top talent within their domestic markets as well.
  • Regulation: Understand the nuances of local regulatory regime, develop relationships with local regulators, and have detailed knowledge of local regulations. Banks that expanded abroad three and four decades ago did not face the level of regulatory scrutiny that banks today face.

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1 World Bank Report, Global Development Horizons 2011—Multipolarity: The New Global Economy.
2 World Economic Outlook Database and International Monetary Fund
3 Fortune Global 500 List, 2013.
4 World Economic Forum report, Redefining the Emerging Market Opportunity: Driving Growth through Financial Services Innovation, 2012

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