Internationalization of Banks: Strategic Patterns and Performance
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A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Slager, Alfred Research Report Internationalization of Banks: Strategic Patterns and Performance SUERF Studies, No. 2005/4 Provided in Cooperation with: SUERF – The European Money and Finance Forum, Vienna Suggested Citation: Slager, Alfred (2005) : Internationalization of Banks: Strategic Patterns and Performance, SUERF Studies, No. 2005/4, ISBN 978-3-902109-29-3, SUERF - The European Money and Finance Forum, Vienna This Version is available at: http://hdl.handle.net/10419/163469 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Subject to the exception provided for by law, no part of this publication may be reproduced and/or published in print, by photocopying, on microfilm or in any other way without the written consent of the copyright holder(s); the same applies to whole or partial adaptations. The publisher retains the sole right to collect from third parties fees payable in respect of copying and/or take legal or other action for this purpose. INTERNATIONALIZATION OF BANKS: STRATEGIC PATTERNS AND PERFORMANCE Alfred Slager PGGM Investments, Rotterdam School of Management Contact Details: RSM Erasmus University Department of Financial Management Burgemeester Oudlaan 50 3062 PA Rotterdam The Netherlands Tel +31 (0)10 408 2790 Fax +31 (0)10 408 9017 E-mail [email protected] Abstract This essay investigates the relationship between the internationalization of banks, profitability and shareholder value. We argue that in general internationalization has not contributed to profitability, and shareholders have not gained by investing in banks with more international activities. A database with internationalization measures is constructed for the 3 to 5 largest banks in 8 countries between 1980 and 2003, leading to a sample of 44 banks. The transnationality index is calculated for each bank, combining foreign assets, foreign income and foreign staff into one index. To examine the relationship between internationalization and performance, we calculated the difference between foreign and domestic profitability. We also investigate if more internationalization is related to more profitability. The key finding is that foreign profitability tends to be lower than domestic, and a negative relationship exists between total profitability and internationalization. Also, a “J-curve” shape appears, suggesting that up to a certain degree of internationalization (roughly 40% of foreign staff, income and assets), costs tend to outrun benefits. A similar pattern emerges for shareholder return: banks that either strongly or moderately increased their internationalization activities generated the lowest shareholder return as a group, while banks that retreated generated the most. For the future, we identify banks which are likely in the near future to reassess their internationalization strategy, either to develop a business model where internationalization activities are a stable and profitable source of income, or where banks refocus their attention to the domestic banking market. TABLE OF CONTENTS 1. Overview 7 1.1. Introduction 7 1.2. Set up of the research 9 1.3. Structure of the paper 10 2. Bank sample and degree of internationalization 11 2.1. The world’s largest banks 11 2.2. Degree of internationalization 16 3. Realized internationalization strategies 23 3.1. Introduction 23 3.2. Historic overview 23 3.3. Internationalization patterns: stylized findings 26 3.3.1 Internationalization cycle 26 3.3.2 Capital market activities 27 3.3.3 Retail banking 28 3.3.4 Organizational form 30 3.4. Realized internationalization strategies 32 3.4.1 Accelerating internationalization 36 3.4.2 Moderate internationalization 40 3.4.3 Imploding internationalization 43 3.4.4 Retreating internationalization 45 3.4.5 Established internationalization 50 3.5. Characteristics of realized internationalization strategies 53 4. Profitability and shareholder value 57 4.1. Introduction 57 4.2. Relationship between profitability and internationalization 57 4.2.1 Hypothetical relationships 57 4.2.2 Internationalization of banks and performance 59 4.3. Is foreign profitability higher than domestic? 60 4.4. Relationship between internationalization and total profitability? 65 4.5. Internationalization and risk/return diversification 71 4.6. Do shareholders gain by internationalization? 72 5. The future of international banking 77 5.1. Summary of findings 77 5.2. Future internationalization 79 5.3. Regional integration: extension of the home market? 85 5.4. Limitations and further avenues for research 87 Appendix: TNI in 1980, 1990 and 2000 89 References 90 SUERF – Société Universitaire Européenne de Recherches Financières 92 SUERF STUDIES 93 7 1 Overview 1.1 Introduction After a relatively quiet period in 2001/2002, international mergers and acquisitions have picked up again. Since the 2003 mergers between Bank of America and FleetBoston, and JPMorganChase’s acquisition of Bank One, speculations were fueled about comparable cross-border deals in the European banking market. A joint study of PriceWaterhouseCoopers and the Economist Intelligence Unit (PricewaterhouseCoopers, 2004) showed that a European strategic response still had to be formulated. Also, smaller “nuts and bolts” acquisitions were found to be more likely than large cross border deals. JPMorganChase announced its purchase of London based Cazenove in October 2004, while Spanish Banco Santander bought British mortgage bank Abbey National for 12.5 billion euro in august 2004, the largest cross border acquisition since HSBC bought French CCF in 2001. On the other hand, restructuring also took place. Credit Suisse announced in December 2004 that it would absorb First Boston, its global investment bank, into the parent organization to revive profits. After barely four years, ING sold the largest part of its German bank BHF to Sal Oppenheim while expanding its Internet banking activities. These examples reflect the increased internationalized nature of banking competitions in three respects (Llewellyn, 1999). Customers that have global financing opportunities are able to arbitrage between domestic, foreign banks and capital markets. Also, banks are not restricted to business in their own country. Finally, regulatory entry barriers have lowered, making it easier for banks to locate in other countries. In other words, many of the largest banks in the world have been struggling toward a new organizational model where terms as home market seem to become a by-product in a broader strategic vision. Swiss bank UBS, the fifth largest bank in the world measured by assets in 2000, has more than 80% of its assets outside Switzerland. Netherlands based bank ABN Amro owns a retail branch network in Brazil, 9,500 km from Amsterdam which constituted 15% of total profits in 2000. Successes in international banking are few, failures have been common. One of the more 8 Overview spectacular failures was the acquisition of American Crocker Bank by British Midland Bank in 1981, costing the bank USD 1bn over the next five years and forcing its strategy to retreat on the British retail banking market. Midland was acquired by Hong Kong based bank HSBC in 1992, a bank who subsequently showed that internationalization can be a profitable activity. From the 1980s banks internationalized on an unprecedented scale. In 2003 the 30 largest banks held more than USD 7,586bn, or 39% of their assets, outside their home country. To understand whether international expansion has affected the banks’ operations, and identify if additional performance and shareholder return was created by internationalization, this study analyzes the internationalization strategies and financial performance of the world’s largest banks from eight countries between 1980 and 2003. Internationalization – undertaking banking activities outside the home country – has been a major driver in the transformation of bank organization in the last two decades. The main findings can be summarized