Deloitte: Bank M&A transactions set to outpace GDP growth in emerging markets
World trade flows, increased gross domestic product (GDP), a growing middle class and new technologies will help banks based in emerging markets expand into developed markets in the coming year. According to Deloitte’s latest report “Banking across borders: International expansion opportunities for emerging markets-based banks”, these banks which have the experience of operating in volatile markets, combined with their knowledge of how to reach unbanked and under banked population, are better positioned to achieve a successful expansion to developed and other emerging markets.
“The banking systems in the Middle East and many emerging markets, which were less exposed to the complex and toxic products and therefore less impacted by the financial crisis of 2008, benefited from opportunities in their domestic markets and have grown their operations and expanded locally thus resulting in stronger balance sheets and larger capital base,” said Joe El Fadl, Partner and financial services industry leader at Deloitte Middle East.
“This relative domestic expansion and growing means allow these banks to invest in growth opportunities Moreover, many of the large banks are considering to leverage their strengths and relative efficiency in their operating model by looking to opportunities of expansion into new markets.”
The Deloitte report also outlines the steps that these banks will need to take in order to expand internationally. This includes factoring in readiness for expansion, lessons learned from expansion from previous decades and potential challenges such as language, culture, talent, regulation, and capital needed to extend their brands into new markets.
According to the Deloitte report, over the last several decades, emerging markets-based banks have followed different paths in expanding their reach around the world. Many Banks have looked to the Middle East region as the next frontier, due to its proximity to the Asian markets, and its untapped potential, as foreign banks had minimal presence in the region at that time. In fact, the World Bank notes that acquisitions from emerging markets are on the rise, projecting the annual value of cross- border M&A transactions to double by 2025, outpacing the underlying GDP growth rates in emerging-market firms’ home countries.1
“Even though Emerging markets-based banks still have domestic expansion opportunities and growing market needs for innovative banking products and services, they are also looking for expansion beyond national borders as their customers expand into new markets and their citizens immigrate to new countries,” added El Fadl.
Today, emerging markets and developed markets each account for half of the world’s GDP.2 However, in the future, the report projects emerging markets to account for more of the global GDP with developed markets accounting for less. Additionally, according to the Fortune Global 500 list the number of North American and European financial services firms on their list has declined, while the number of those based in Asia, Central and Latin America has risen.3
According to Deloitte’s report “Banking across borders: International expansion opportunities for emerging markets-based banks”, the key steps emerging markets-based banks can take toward expansion into developed and developing markets, while assessing their readiness along the way, include:
Strategy: Understand what market segments to pursue. According to a recent study published by the World Economic Forum, three areas afford the greatest opportunities in emerging markets – consumer financial services, small and medium enterprises, and corporate.4
Execution: After defining a clear strategy for international expansion, emerging markets-based banks should focus on how they intend to implement their plans.
Infrastructure: Have adequate technology and business systems. In some emerging markets, infrastructure resources — ranging from reliable transportation to sources of electricity — are scarce or limited.
Talent: Human resources is one of the most critical resources that emerging markets-based banks will need when expanding: people who understand the culture, language, and business practices in emerging markets. A bank with a reputation for growth and the ability to offer international assignments is more likely to attract top talent within their domestic markets as well.
Regulation: Understand the nuances of local regulatory regime, develop relationships with local regulators, and have detailed knowledge of local regulations. Banks that expanded abroad three and four decades ago did not face the level of regulatory scrutiny that banks today face.
Originally published on www.zawya.com