Globalisation winds in the Latin American banking industry

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1. Globalisation winds in the Latin American banking industry An Economist Intelligence Unit report sponsored by MasterCard Worldwide Latin America & Caribbean 2.…
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  • 1. Globalisation winds in the Latin American banking industry An Economist Intelligence Unit report sponsored by MasterCard Worldwide Latin America & Caribbean
  • 2. Preface Globalisation winds in the Latin American banking industry is an Economist Intelligence Unit briefing paper, sponsored by MasterCard. The Economist Intelligence Unit’s editorial team conducted the interviews, executed the survey and wrote the report. The findings and views expressed in this report do not necessarily reflect the views of the sponsor. Kim Andreasson was the editor and project manager. Thierry Ogier was the author of the report. Maureen Van Kuren was responsible for layout and design. Our research drew on two main initiatives. We conducted a global online survey in October 2007 of 208 financial services executives in order to assess the impact of globalisation on the Latin American banking industry. To supplement the results, we also conducted in-depth interviews with financial services experts in Latin America. Our thanks go out to all survey respondents and interviewees for their time and insights. June 2008
  • 3. Globalisation winds in the Latin American banking industry Summary G lobalisation forces have a strong impact on the Latin American financial services industry, and consolidation is far from over, especially in retail banking. Most financial services executives surveyed for this report distant runners-up. Retail banking, meanwhile, is the business area where competition is expected to increase the most within the next five years. feel that the trend will accelerate in the medium Executives expect Latin America’s term and that local banks are likely to become the target of foreign acquirers. A key finding of the importance to grow as a proportion survey is that a majority of executives, especially of their organisation’s business those who are based in North America, expect Latin America’s importance to grow as a proportion of their organisation’s business. Key findings Which of the following best reflects the way your organisation n Latin America is increasingly important to organi- manages its operations in Latin America? sations’ globalisation strategies. A large majority of We have offices located in several Latin American countries 44% executives surveyed expect that a greater share of banking revenue will come from Latin America in the We do not have offices in Latin America but manage our medium term. This trend is especially strong among regional operations there from executives based in North America. the outside 26% n Competition to attract customers in Latin America We have office(s) located in one will intensify. Meanwhile, financial services in the Latin American country 30% region are still relatively underdeveloped and organi- sations are in a position to enhance their portfolio of financial products. n Brazil is the most attractive market in the region. Most survey respondents expect the global Brazil is clearly identified as the favourite investment economy to have a greater impact on their destination by survey respondents (71%), followed by company’s operations than local markets will Mexico (43%) and Argentina (38%). have in the medium term. As a result, the current n Competition in retail banking will increase the financial turmoil worldwide is likely to affect the most. According to survey respondents, more than region, although Latin America looks less vulnerable one-quarter (27%) expect the greatest increase in than it used to. competition in retail banking, compared with 17% in Brazil is considered the main investment investment banking, 15% in corporate banking and destination in the future, with Mexico and Argentina 12% in consumer finance and cards. © The Economist Intelligence Unit Limited 2008 3
  • 4. Globalisation winds in the Latin American banking industry Introduction G lobal banks have positioned them- selves around the world in order to capitalise on strong economic growth in emerging markets and the strengthening of large consumer How will increased competition impact your organisation’s banking activities in Latin America? Will increase Customer service Will remain the same Will decrease Don’t know/Not applicable markets. Some of the biggest corporate transac- 56% 26% 2 15% Profitability tions, such as ABN Amro’s recent acquisition by a 34% 32% 17% 17% consortium of other European banks (RBS, Fortis and Product proliferatioin 53% 29% 3 15% Santander), have had a direct impact on the Latin Product customisation American financial market. 55% 27% 5 14% Product commoditisation In order to assess the effect that globalisation 37% 40% 7% 16% will have on the Latin American banking industry, Penetration of new customer segments 58% 26% 2 14 % we conducted a global online survey, sponsored by MasterCard, of 208 financial services executives who deal with the region. The results point to investment destination. The quantitative survey was the growing importance of Latin America as an complemented by three interviews with banking experts in the region. According to Pedro Malan, a former Brazilian About the survey finance minister who now chairs Unibanco (one In October 2007 the Economist Intelligence Unit surveyed 208 of Brazil’s main retail banks), globalisation forces financial services executives in order to assess the impact of globali- have already led to a revolutionary shift in consumer sation on the Latin American banking industry. Respondents includ- expectations. The globalisation of consumer ed representatives of financial institutions that are active in Latin patterns and aspirations has also acted as a stimulus America. They were drawn from a wide cross-section of regions, towards social mobility. “This is an extraordinary including South America (23%), North America (22%), Europe opportunity for banks and their business,” says Mr (27%—including eastern Europe and the CIS), Asia Pacific (23%) as Malan. “Latin America will offer fertile ground for well as the Middle East and Africa (5%). Sixty-six percent of survey expansion strategies.” respondents worked for institutions that have fewer than 1,000 Vicente Rodero, director of a Spanish bank, BBVA, employees while 12% worked for organisations that employ more for South America, goes further, predicting that the than 10,000 people. More than one-third (36%) were employed by winners will be the financial institutions that respond organisations that have less than US$1bn in global assets, while more efficiently to consumers’ expectations and 23% worked for organisations that have more than US$500bn in “customise the financial-product supply according assets. Fifty-nine percent of respondents described themselves as to the profile of each consumer, in a multi-channel board members, C-level executives or vice-presidents. focused environment,” says Mr Rodero. 4 © The Economist Intelligence Unit Limited 2008
  • 5. Globalisation winds in the Latin American banking industry Part I: The increasing importance of Latin America as an investment destination—expansion prospects A fter hyperinflation and a succession of severe economic crises, Latin America’s economic fortunes have been revived in recent years. A deep restructuring of the banking What proportion of your organisation’s annual revenue do you expect to come from Latin America in five years’ time? Less than 10% Reduced operating costs 37% system was implemented in several countries, and 26% a series of foreign takeovers and acquisitions have Increased revenues 11% since taken place. The nature and scope of the activ- Improved customer service ity varies depending on the country. For example, it 4% Faster responses to changing demand has been stronger in Mexico than in Brazil. The global 17% acquisition of ABN Amro by a consortium of European Improved customer insights to facilitate development 6% banks in 2007 had a direct impact in the region, as one of the bidders, Santander, has a strong interest in developing its activities in Latin America, as part of of institutional building, democracies are getting its globalisation strategy, especially in terms of retail stronger and economies are ready to take off. They banking. “Latin America has the highest GDP per head need a strong banking sector,” he adds. among emerging markets, double that of India and BBVA’s Mr Rodero sees “an increase in consumption 35% higher than China. But if you look at the finan- and a significant increase in the demand and needs cial sector, it is still underdeveloped, with low levels for financial products and services.” Meanwhile, of credit-to-GDP ratio,” says José Juan Ruiz, director consumer preference is becoming more globalised of research and strategy at the Santander Group for and universal, says Unibanco’s Mr Malan: “As income the Americas. “Progress has been achieved in terms per head increases, there is a gradual alteration in consumption standards toward more global patterns. What proportion of your organisation’s annual revenue is currently derived from Latin America? In Brazil, for instance, there is a strong interest in new, technologically advanced products, which is also Less than 10% 60% an expression of globalisation. This has implications 11-30% 10% for the expansion of the retail industry: references are becoming more global all the time.” As Santander’s Mr 31-50% 5% Ruiz points out: “People are becoming richer and this points to the need to finance their spending.” 51-70% 2% More than70% 16% The wind ahead Against such a background, banking activity is Don’t know 7% expected to intensify in the region. More than three- quarters of survey respondents pointed to some form of © The Economist Intelligence Unit Limited 2008 5
  • 6. Globalisation winds in the Latin American banking industry expansion strategy to increase their presence in Latin How do you think your organisation’s investment in its cards payments operations in Latin America America, preferably organic growth (23%) or strategic will change in the next five years? alliance (22%), rather than merger or acquisition Increase more than 5% (18%) or a joint venture with a local partner (15%). 31% More specifically, a large majority of executives Increase 1-5% 17% expect that a greater share of banking revenue will No significant change 12% come from Latin America in the medium term. This Don’t know / Not applicable trend is especially identified by executives based in 40% North America. When asked about the proportion of their organisation’s revenue that is derived from Latin them expect that this will happen in five years’ time. America, executives based in North America forecast a More than one-half of respondents who think that strong increase. At present, 61% of them say that the their bank’s revenue in Latin America will increase to region accounts for less than 10% of their revenue. between 51% and 70% of annual revenue within five years also come from North America. This compares with only about one-quarter at present. Brazil, Mexico and Argentina are the Geography most attractive markets in the region. Brazil, Mexico and Argentina are the most attractive Brazil is clearly identified as the markets in the region. Brazil is clearly identified as the favourite investment destination (71%), favourite investment destination probably because of its promising macroeconomic outlook following years of slow economic growth. It is ranked well ahead of Mexico (43%), where there However, when asked about their five-year prospects, is little room for further acquisition (investment only 23% of respondents expect that the region will there would rather focus on organic growth), and account for less than 10% of their revenue. Argentina (38%), which has revived after a dramatic Meanwhile, the proportion of those who expect debt default at the beginning of the decade. an increase rises significantly: at present, less than Nevertheless, executives based in North America 10% say that Latin America accounts for between 11% would rather invest in Mexico (58%) than in Brazil and 30% of their revenue; one-third of them expect (53%) and Argentina (24%). This is likely attributed that this will happen in five years’ time. Only six to the proximity and the integration between the respondents say that Latin America currently accounts US and Mexican economies. Meanwhile, a large for more than one-half of their revenue; and 11 of proportion of west European-based executives 6 © The Economist Intelligence Unit Limited 2008
  • 7. Globalisation winds in the Latin American banking industry Do you think the following are likely outcomes of the current Business areas turmoil in international capital markets on the Latin American financial industry by the end of 2007? According to 27% of survey respondents, retail Likely Unlikely Don’t know banking is the business area where competition is expected to increase the most within the next five There will be negative impact on liquidity and credit years. Interestingly, some retailers have already 56% 36% 8% Institutions will struggle to stay in business launched their own banking activities in the region, 31% 57% 12% such as Wal-Mart in Mexico and Mexico-based Azteca Industry consolidation will accelerate 39% 30% 9% in Brazil (Banco Azteca, which is linked to Mexican retailer, Elektra, has recently invested in Brazil and targeted low-income consumers in the north-eastern selected Brazil as their priority (77%). region). BNP Paribas’s consumer credit arm, Cetelem, The survey indicates a correlation between has also signed partnerships with Carrefour in Brazil as executives considering investing in Mexico and well as with retailers in other countries in the region. those who are upbeat regarding retail banking Executives who are based in South America point and consumer finance. In fact, Mexico receives its to retail banking as the best investment opportunity highest marks as a future investment destination (38%). There are also a large proportion who point opportunities lie in consumer finance (56%) and to microfinance (30%) as well as consumer finance retail banking (48%). and cards (28%) as a good investment opportunity. At the same time, executives who think that Which of the following segments do you think offer the corporate banking, investment banking and asset best investment opportunities in Latin America for your management offer the best investment opportunities organisation? Select up to two overwhelmingly look to Brazil (over 75%) as an Investment banking investment destination. Among those who see 36% Assest Management corporate banking as an opportunity, Argentina also 24% receives high marks (54%). Corporate banking 22% Latin American institutions may eventually Retail banking 19% become a target, with 56% of respondents saying Consumer finance and cards that many will end up being controlled by newcomers 17% Private banking although few admit that their own banks may 14% be acquired in the process. “The consolidation Microfinance 11% process among the largest banks is largely over in Other, please specify Brazil. I think it would be difficult among the big 7% Don’t know players here, although it may proceed with smaller 6% institutions,” explains Mr Malan. © The Economist Intelligence Unit Limited 2008 7
  • 8. Globalisation winds in the Latin American banking industry Part II: Globalisation versus local market dynamics— the state of retail banking C ompetition from foreign banks has been identified as the main feature of globalisation in the financial industry, ahead of the need to invest in information technology system, will require simple and fixed-price products.” The global economy is expected to have a greater impact on their company’s operations than local markets in the medium term. The main risk (IT). When asked about the specific impact on their to this scenario is the impact of the international own organisation, executives pointed to product financial turmoil in the region. While Latin America customisation, new customer segmentation, and is indeed perceived as being as vulnerable as customer service. Mr Rodero, from BBVA, points other emerging markets, it is also viewed as less to the need to “implement a low-cost multi- fragile than in the past, which is a sign of investor channel banking model focused on technology and confidence in the region. innovation.” Meanwhile, the primary source of globalisation trends to affect the region is still expected to come from North America (52%). Moreover, the general Latin America is perceived as being perception of brands of foreign banks in Latin America is positive, according to 88% of South as vulnerable as other emerging American-based survey respondents. As a result, markets. It is also viewed as less there will be less risk of rejection from consumers in the event of foreign acquisitions. fragile than in the past Among those who say that local market dynamics will have the greatest impact on their organisation, 88% say Brazil is one of the most attractive The quantitative survey points to a correlation investment destinations. Mr Malan, of Unibanco, between those who agree that “competition from also insists that local institutions can still rely on the foreign banks will intensify” and those who think importance of custom and consumer relationships that their “organisation’s investment in its card- (thereby fostering trust and loyalty). “The weight of payment operations in Latin America will increase by their tradition and their knowledge of the market, more than 5% in five years”. Adds Mr Rodero: “The customer relationships based on trust and credibility supply of products will be associated to credit cards, are a great asset,” he says. and without a doubt with a proposal for the bank Meanwhile, the growth outlook for electronic business, which will have a very radical development payment systems looks promising, and its of multi-channel banking. The services and products development is seen as a natural trend. Mr Malan sees supply will have very low costs, as a large part of a great future in credit cards for individual consumers the population, which will begin to use the banking as well as retailers’ own cards and co-branding: “The 8 © The Economist Intelligence Unit Limited 2008
  • 9. Globalisation winds in the Latin American banking industry Which of the following segments serve as your potential is still enormous for payments and fund organisation’s primary income stream in Latin America? transfers via cards and consumer credit—not only with the main brands, as today there are a lot of large Investment banking 19% store chains issuing cards that may also be used in Retail banking 18% other affiliated outlets,” he says. Corporate banking More than one-half of respondents who gave an 18% Asset Management opinion on the future of card-payment operations 10% predicted an increase in investment of more than Private banking 7% 5% over the next five years, and only one survey Microfinance taker predicted a decrease of more than 1%. Online 4% Consume finance and cards banking and e-payment operations are priority 4% investment destinations as competition intensifies. Other, please specify 17% A large proportion of investment bankers select Don’t know 4% online banking, card-payment and e-payment operations as key investment priorities in the next five years. The most positive impact of heightened If your organisation intends to increase its presence competition, meanwhile, is expected to be a greater in Latin America, what type of expansion strategy is it most likely to favour? access to capital markets (international and local), as well as the effect on revenue and the ability to find a Opening our own offices 23% suitable bank as a partner. Strategic alliance Finally, the adoption of best practices is regarded 22% Merger or acquisition as the most positive impact of gl
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