Market Banks

Abstract

The greatly improved economic fundamentals of the major emerging economies over the last decade have propelled several emerging banks into the ranks of the world’s largest. Despite their importance in the global economy, the internationalization of emerging market banks remains an understudied phenomenon. This article examines factors that may influence the internationalization strategies of emerging market banks in the private banking sector, both when going abroad (take-off) and upon arrival in a host country (landing). The private banking sector is of significant interest given its importance in many leading financial centers around the world while undergoing major transformation due to the worldwide financial crisis, several recent scandals, and a fast-changing regulatory environment. We highlight the internationalization strategies of two banks from emerging countries, China and Brazil, and their experience in Switzerland’s traditional private banking sector. These two cases highlight factors that may influence successful internationalization such as prior industry experience, existing client base, entry strategy, ownership type, and the liability of foreignness. Our findings offer valuable implications for managers from other emerging economies by providing a better understanding of how emerging market banks expand internationally.

Growing wealth in emerging markets

Global wealth continues to grow and to produce an increasingly large number of high net worth individuals (HNWIs), especially in emerging coun- tries. A dramatic shift in global wealth distribution is currently taking place around the world, mainly in the Asia-Pacific region where the number of HNWIs is growing faster than the rate of GDP in most countries. Many of these individuals are entrepre- neurs who demand access to the same investments and services offered to their counterparts in devel- oped countries. Some of this new wealth has found its way to the leading private banking centers around the world. Several well-capitalized and well-managed emerging banks are gradually enter- ing a select group of major institutions in interna- tional private banking to claim their share of this lucrative sector, encouraged by the fact that more and more of the HNWI universe is composed of citizens and residents from emerging economies. This represents challenges and opportunities for both emerging market banks (EM-banks) and tradi- tional banks.

Banks must be prepared to handle increasingly sophisticated demands from this new emerging en- trepreneurial class (including both personal and corporate clients). All major institutions in private banking aspire to provide a global range of products and services and to capture an increasing number of these valuable clients. An attractive option for large emerging banks is to internationalize and gain the necessary private banking knowledge abroad in order to assimilate useful business know-how for the benefit of their offshore and onshore clients (normally the larger share of a bank’s wealth man- agement business who benefit from any upgrade in a bank’s global brand and reputation).

Increasing international role of emerging market banks

Greatly improved economic fundamentals of the major emerging economies over the last decade have propelled several banks from emerging coun- tries into the ranks of the world’s largest (either by assets and/or capital). Of the top 50 banks in the world in 2015 (in total assets), 22 were from emerg- ing countries (Daniels, 2016). Despite growing wealth, most emerging market banks currently pro- vide relatively limited private banking services to their domestic high net worth clients.¹ Historically, clients from emerging markets have invested abroad for a number of reasons: economic volatility and the lack of political stability in their home country, investment diversification, better service, and tax avoidance. Clients from emerging markets have traditionally placed their investments in de- veloped markets, including the usual wealth man- agement capitals around the world, such as Switzerland, and with leading international private banks. Nevertheless, EM-banks are poised to be- come increasingly important participants in inter- national private banking. As they grow in size, together with an ever-increasing number of HNWIs and a greater share of wealth created by their compatriots, EM-banks will seek to internationalize and capture a share of the growing business of managing both onshore and offshore emerging wealth.

Emerging market banks and Swiss private banking

The private banking sector is of significant scholarly and business interest as it is undergoing major transformation due to the worldwide financial cri- sis, several recent scandals, and a fast-changing regulatory environment. Switzerland has been the historic center of international private banking with many family-owned banks as well as large global banks embedded in the local institutional and social fabric. This provides an interesting base from which to explore internationalization strategies, motives, and methods of banks from emerging countries and to better understand the challenges and opportu- nities they face upon entry into the Swiss bastion of private banking.

The entry of EM-banks into the Swiss private banking sector also represents a timely research topic given the substantial restructuring and con- centration of the sector since the 2008 financial crisis. In addition, this sector has faced major up-heavals due to increased transnational regulation, pressures by international authorities regarding tax evasion, and the loss of traditional competitive advantages such as bank secrecy. Private banking is currently characterized by overcapacity, a trend captured in the important layoffs that have recently taken place. Indeed, the total number of banks in Switzerland decreased from 283 to 275 in 2014 while the number of foreign banks decreased from 145 to 129 from January 2012 to May 2013 (Kirchfeld & Logutenkova, 2013). The 2014 Annual Report of the Association of Foreign Banks in Switzerland listed 118 foreign banks as members at the end of 2014, representing 42% of all banks in Switzerland. While banks and other financial intermediaries struggle to adapt to the evolution of the sector, additional research is needed to understand the implications of the arrival of emerging banks.

A handful of emerging banks from Brazil, Russia, India, and China (the BRIC countries) have entered the Swiss private banking market. While there are several banks from other emerging economies such as the Persian Gulf and Asian countries, there were, until recently, a total of five banks from BRIC coun- tries in Switzerland: Banco Itau and J. Safra Sarasin from Brazil, Hinduja Bank from India, and Sberbank and Gazprombank from Russia. Another Brazilian bank, BTG Pactual, acquired Lugano-based BSI (Banca della Suizzera Italiana)–—the 11th biggest Swiss private bank with approximately $90 billion in assets under management (and formerly owned by Italian insurer Generali)–—in September 2015 but quickly sold it in early 2016 under pressure to sell assets to shore up its capital following events linked to the Petrobras scandal in Brazil. Meanwhile, China Construction Bank (China’s second largest state- owned bank) opened its branch in Zurich in January 2016.

Given the economic growth of emerging coun- tries and the rising presence of EM-banks around the world, it is important to understand the factors that may influence their internationalization strategies both when going abroad (take-off) and upon arrival in the host country (landing). In this article, we address the following questions:

• What are the internationalization strategies, mo- tives, and methods of EM-banks when entering the private banking sector in Switzerland?

• Which factors may influence EM-bank internationalization strategies?

• What are the challenges and opportunities that EM-banks face upon entry into Switzerland?

Drawing on the literature on the internationaliza- tion of emerging market companies (Jormanainen & Koveshnikov, 2012; Luo & Tung, 2007), we focus on a specific industry (private banking) and on a specific setting (Switzerland) in order to provide greater understanding of the forces driving the internation- alization strategies of EM-banks as well as the chal- lenges and opportunities faced by these banks upon arrival. In addition, we focus on private banking given its strategic importance to the Swiss economy. Based on a detailed analysis of secondary data sources, complemented by off-the-record discus- sions with bankers, we provide examples of two banks representing two very different experiences, detailed in the following sections. Our case studies reveal factors which may have impacted the strat- egies of each bank and contribute to a better understanding of the internationalization strategies of EM-banks.

Final thoughts

Global wealth will continue to grow and to produce an increasingly large number of HNWIs globally, especially in emerging countries. Much of this wealth will continue to find its way to the leading private banking centers around the world. Several strong, well-capitalized, and well-managed emerg- ing banks will break into the select group of major players in international private banking and take the opportunity to increase their share of this lu- crative market, encouraged by the fact that more and more of the HNWI universe is composed of citizens and residents from emerging economies.

Emerging banks should strive to adapt different internationalization strategies driven largely by their desire to gain knowledge and specific private banking know-how for their offshore as well as onshore business. The entry of emerging banks into the exclusive group of leading private banks, though a recent phenomenon, will undoubtedly change the traditional private banking sector as we know it. This phenomenon will yield new institutions (from consolidation and M&A activity) as well as impact the marketing, training, and management functions of many existing institutions.

The current list of the world’s leading banks includes a growing number of banks from emerging countries. Many of these banks have been slow to internationalize, often due to the size and attrac- tiveness of profitable domestic markets. A few, however, have initiated their process of interna- tionalization by expanding initially into neighboring countries and following some of their ‘national champions’ and other large corporations abroad as well as HNWIs from their home country.

Emerging banks will enter the private banking market by leveraging their competitive advantages including their deeper knowledge of the investment behavior and service preferences of emerging cli- ents. Faster growing economies from emerging countries will produce bigger banks wishing to carve a niche in the profitable private banking business, attract a growing number of emerging clients, and pose additional challenges to the traditional private banking sector. Several of these emerging banks have developed very competitive world-class tech- nology and retail banking networks at home while offering limited private banking services to their affluent domestic clients. These emerging banks will soon meet, if not exceed, industry performance benchmarks and will increasingly turn their atten- tion to international private banking and further contribute to the industry’s rapidly changing envi- ronment and future prospects.