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Market maturity and intense competition forces banks to expand overseas
Overseas expansion is a key trend in the global banking industry as many major players look to reduce their reliance on mature and intensely competitive domestic markets. The push for overseas expansion is beginning to kick start M&A activity within the sector. CCB, ICBC, Credit Agricole, and Mitsubishi UFJ have all engaged in M&A deals that involve the purchase of at least a stake in a non-domestic player since 2013.
As explored in detail in the MarketLine case study Top ten global banks: An analysis of financial performance, growth opportunities and risks (MarketLine subscribers can view the case study here, non-subscribers can purchase the report from our store), in the case of Western European banks such as Barclays and BNP Paribas, this is an attempt to reduce the risks associated with concentration in mature, slow-growth markets that continue to suffer from poor credit conditions, while also adding to the top line by providing services in underdeveloped Asian and African markets. In the case of China’s big four banks, the need to grow their footprint is not as urgent, but prudent. The increase in NPL rates seen in 2014, linked to slowing economic growth, have convinced China’s biggest banks that they cannot rely on the Chinese mainland to deliver growth indefinitely. M&A is proving a key strategy in achieving these aims.
During FY2014, ICBC acquired a 75.5% stake in Turkey’s Tekstilbank for TRY669m ($305.8m), a small bank but one which offers ICBC a step into the fast-growing Turkish economy. It also pushed further into Africa via the acquisition of a 60% stake in South Africa-based Standard Bank, a transaction that cost $690m. Rival CCB has also acted similarly, purchasing a 72% stake in Sao Paulo based BIC for BRL1.6bn ($680m). BIC has 45 branches across Brazil and offers a good entry point to a potentially lucrative market.
Banks headquartered in more mature markets have not been left behind. For example, in February 2015, Credit Agricole announced that it had agreed a deal to buy Austrian asset manager Bawag PSK as it looks to further its growing reputation as a go-to provider of asset management services in Europe, while Japan based Mitsubishi UFJ, through its subsidiary Bank of Tokyo, acquired a 20% stake in Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) in May 2013. It furthered this Asian M&A program in December 2013, when it purchased a 72% stake in Thailand’s Bank of Ayudha (commonly known as Krungsri), a clear sign that it is looking to gain a foothold in Asia’s newest wave of growth markets.
Such activity offers exciting growth opportunities for the banks involved, but it is also a sign of issues on the domestic front. This is a common issue in many mature markets so competition to establish a foothold in growth markets such as the MINT countries (Mexico, Indonesia, Nigeria, and Turkey) is expected to heat up as banks look to reduce their reliance on sluggish markets in countries like Japan, the US, the UK, and, to a lesser extent, China.