They might be giants A special report on banking in emerging markets l May 15th 2010 BankingEmergingMktsSRCOV.indd 1 04/05/2010 14:15 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 they will use their new•found strength Why it is hard to copy Santander. Page 12 LONG the breezy three•kilometre banks in the developing world now mea• Old friends only Astretch of Mumbai’s Marine Drive you sure up. Not only are they well capitalised To do well in China, Western banks need a pass cricket pitches, destitute people, luxu• and well funded, they are really bigand long history. Page 14 ry hotels, plump joggers and advertise• are enjoying rapid growth. By prots, 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 benet 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 thrivingjust 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 problemsindeed 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 prots. 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 Griths, 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 Economist.com/specialreports 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 Economist.com/audiovideo/specialreports But it is by the hard stu , money, that lose corporate customers to local bond 1 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 suciently 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 2009the 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 tionalsetting 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 diculty is mutual dicult 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• pearlsbranches 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.