BackTowards more localized banking
Many global lenders have been cutting back on the markets and businesses they choose to operate in
Premium
ICICI Bank Ltd, India’s largest private lender by assets, has undertaken an exercise to “optimize" capital across its international subsidiaries in recent quarters.
As per the transcript of the bank’s post-earnings conference call this week, its total equity commitment in its two overseas subsidiaries—ICICI Bank UK and ICICI Bank Canada—has reduced from 11% of its net worth in March 2010 to about 5.6% now. In December, ICICI Bank had sold its subsidiary in Russia as well.
Essentially, what the bank is doing is reducing its overseas exposure as it reassesses the risks and opportunities in foreign markets. There’s no quibbling with the logic behind that move given that a number of western markets continue to see tepid growth and margins in international lending are far lower than in domestic lending.
It wasn’t always this way. In the pre-crisis years, ICICI Bank and a number of other Indian lenders were keen to expand overseas with the idea of servicing corporate Indian clients who, at that time, were looking to go global. The crisis changed all that and now most are focused inwards.
Interestingly, the trend of an increased focus on the home market is not restricted to Indian banks. It appears that banks globally are becoming more localized, both in terms of operations and lending.
According to the International Monetary Fund’s (IMF) Global Financial Stability Report released in April, cross-border bank lending has declined since the global financial crisis, while international banks have shifted their international business models towards more local operations.
The share of branches and subsidiaries abroad has fallen by about 5% between 2008 and 2013, the IMF data showed. Cross-border claims as a percentage of banking assets remain below their pre-crisis levels. A lot of the cutback has come from European lenders, who are still in the midst of a slow and painful process of repairing their balance sheets. But it is not restricted to them.
A number of global lenders have been cutting back on the markets and businesses they choose to operate in. As recently as February, Royal Bank of Scotland Plc (RBS) said that it would shut down banking operations in 24 countries, including in India. Standard Chartered Plc, too, has been in the cut-back mode and has been trimming business lines.
While individual lenders are being driven to rationalize operations because of pressure on their profits, increased regulation has played a role as well. Most countries have tightened banking regulations after the financial crisis, and a number of banking regulators now want local operations of foreign banks to adhere to the domestic regulations. India’s attempt to push foreign banks towards creating local subsidiaries is a case in point.
However, this increased localization is not all bad. In fact, the IMF noted that the shift has a positive effect on financial stability of host countries as it reduces exposure to global shocks.
Meanwhile, the new theme in global banking appears to be regionalization, which is particularly true in Asia. The IMF’s analysis of Asian banks showed an increased concentration in the region. The share of regional assets more than doubled from about 10% to 20%, between the pre-crisis and post-crisis periods, said the IMF.
You can see this theme playing out in India as well, where large Asian lenders such as Singapore’s DBS Bank Ltd have been trying to expand rapidly.
DBS’s loan book in India tripled to 15,155 crore in the four years between March 2010 and March 2014, even though that rapid expansion led to a spike in bad loans for the bank.
Australia’s third largest lender, Australia and New Zealand Banking Group Ltd (ANZ), which sold its business in India to Standard Chartered in 2000, has also re-entered the market. In a recent interview to Mint, a top executive at ANZ spoke of plans to grow the business in line with growing trade between India and Australia.
In an October 2014 report, Mint reported that Chinese, Japanese and Korean banks have also increased lending to Indian companies, stepping into a space that was vacated by western banks. A lot of this is linked to increased business dealings within the region, which is opening up lending opportunities.
The implications of that trend, however, may not be all good.
“The strengthening of regional linkages, particularly in Asia, implies a heightened exposure to shocks emanating from within the region," said the IMF in its Global Financial Stability Report, adding that shocks originating from outside the region may spread faster.
Although most banks are not directly connected to one another, the combination of strong linkages within countries and regions may allow for rapid transmission of shocks across regions, noted the IMF.
Ira Dugal is assistant managing editor, Mint
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
