ICBC, the Chinese bank which opened its first Dutch branch in Amsterdam in 2011, is the world’s largest bank (in terms of market value), with 240 million private and 40 million corporate customers. The 25 largest banks worldwide include eight banks from emerging markets: apart from ICBC, three other banks from China, three from Brazil and one from Russia. In 2010, banks from emerging markets together accounted for 30% of profits, one-third of income and one-half of aggregate tier 1 capital of the banking system worldwide.
In recent years, banks from emerging markets have increasingly outperformed their counterparts from the Western countries in terms of growth. In the West, the credit crisis has had disastrous effects, but its impact on banks from emerging markets has been considerably more muted. In part, this may be ascribed to an entirely different loan-to-deposit ratio; where emerging-market banks are concerned, the level of outstanding loans is low relative to their holdings of savings. This has spared them a lot of trouble and, since they have been affected to a much lesser extent by the problems in the international financial markets, they are still in a position to grant loans on a large scale. In addition, for these banks, the transition to Basel III is simpler. They already enjoy very high capital ratios, have fewer high-risk assets and are reluctant in engaging in investment banking.
At the same time, in their home regions, there is a tremendous market waiting to be explored. Among the populations of emerging markets, many do not yet have access to banks. With prosperity on the increase, ever more people will require banking services. An added factor is that, at this juncture, growth prospects are much more favourable for the emerging markets than for the advanced economies. All this suggests that an increasing number of banks from emerging markets will feature among the world’s top banks.
Stretching their wings
Does all this mean that, in a few years’ time, the Amsterdam banking district will be dominated by Brazilian and Chinese banks? There is reason to doubt this. First, the emerging-market banks will have to accommodate the growing demand for credit from their own populations, leaving them with less capital for foreign expansion. Moreover, large amounts of savings are held with less-than-dynamic state banks, which evince no interest at all in expanding abroad. Finally, the supervisory authorities will tend to limit banks’ foreign expansion, since the use of domestic depositors’ funds to finance establishments abroad cannot but lead to increased risk exposure.
On the other hand, many of the emerging-market banks enjoy sound funding positions and high profitability levels, making it easier for them to undertake new investment and build up capital buffers. As a result, their position differs fundamentally from that of banks from the advanced economies, which, forced by circumstances or otherwise, often put up their foreign branches for sale. An added factor is the enormous international expansion of major industrial corporations from the emerging economies, taking the banks with them in their wake. Thus, all in all, it may be expected that emerging-market banks will continue to expand not just in their home countries but also internationally.
Still, it is likely that their expansion will mainly centre on their home regions. Thus far, banks from emerging markets have predominantly invested in their own regions, reflecting the fact that it is easier to do business in a country where customs and practices are familiar. In addition, at present, the advanced economies, suffering as they are from the debt crisis and a poor economic outlook, do not hold out a generous profit potential. Moreover, stricter regulation will also complicate the establishment of new branches. Better growth opportunities are readily available in neighbouring countries – today’s and tomorrow’s emerging economies.