By Joseph Neu
Banks hoping to maintain international networks face growing challenges, especially second-tier global banks eyeing relevance outside home markets.
One of the four big themes from SWIFT’s SIBOS conference last year was the growing importance of transaction banking, which SWIFT is all about facilitating. Corporate banks have to varying degrees made their transaction banking business a strategic focal point, because it is risk-weighted asset-friendly, creates stickier relationships and generates annuity-like flows. Unfortunately, succeeding as a global player in the business is becoming increasingly difficult, and even showing staying power as a regional player requires smart actions. Judging who is being smart is a trend for treasurers to follow. Here is an analysis framework using ANZ as an example.
Not just the people
One way to judge who is being smart is to follow the people. For example, just a month after publishing an article featuring Carole Berndt, then head of global transaction services (see “RBS Stays Committed to Global Transaction Services,” December 2014), which surveyed RBS’s strategic commitment to transaction banking and its remaining international network (amidst overall consolidation), Ms. Berndt departed for ANZ. Her departure followed that of several bankers in Asia-Pacific, including Anand Pande, global head of trade, in October. Notably, she also joins a number of corporate bankers from other banks who have left for ANZ recently: Farhan Faruqui, who was Citi’s Head of Global Banking for Asia-Pacific until May, became CEO for international banking, and Philippe Jaccard, who left Citi to become Head of Global Liquidity Management the year prior. But treasurers should not necessarily short RBS and invest in ANZ based on these moves.
SMART ALLIANCES
Another way to assess if banks are being smart, which McKinsey emphasized in a SIBOS presentation, is if they are looking at new cooperation and partnership models to expand offerings and broaden international networks.
According to McKinsey, these new partnerships will likely take four different forms:
1) Regional-to-local agreements: Regional leaders partnering with local champions in clearly defined markets. Using ANZ again as a potential example, the bank has said it prefers to have wholly owned businesses in Asia, which it cited as a reason to pull out of Vietnam and into Cambodia last year.
2) Inter-regional agreements: Regional leaders entering “deep” and “peer-to-peer” partnerships in complementary regions (e.g., a strong Asia player with a strong transaction bank in Europe), typically with “light integration” of systems and processes. Using this template, ANZ could partner with RBS, which is strong in the UK and Europe, whereas ANZ is strong in Australia, New Zealand and Asia.
3) Regional supra-agreements: Global powerhouses partnering with a regional leader or multiple local champions in a region not yet covered by a standardized “supra-agreement” with deep technical integration. Accordingly, an ANZ might partner with a Citi, BAML or JP Morgan to combine its super-regional strategy with global banks that find it increasingly costly to maintain their global presence.
4) White labeling: Global powerhouse/regional leader providing specific product capabilities to a local champion. One of ANZ’s strategic priorities is to leverage “insight-driven” solutions for clients. It might do this on a broader scale if it would offer these solutions locally without attaching the ANZ brand or insisting on full ownership of the platform. With its Transactive Trade portal for example, it could effectively be at both ends of the trade transaction with more clients that see the need to utilize a local bank in certain key markets.
REALISTIC ABOUT OBJECTIVE CHALLENGES
Finally, smart banks need to be realistic about the challenges they face in meeting strategic objectives. McKinsey identified five key challenges for which banks need smart answers (see box, previous page). In the case of ANZ, according to East & Partners, an Australia-based Asia-Pacific banking market research firm, “tougher rules requiring the big banks to hold larger capital buffers for absorbing losses could prove more than a ‘bump’ in the road for ANZ Bank’s plans to lift its Asian presence. The bank currently draws just 20 percent of operating revenue from outside Australia and New Zealand.”
Per East & Partners, ANZ has set as part of its “super-regional” bank strategy the target of obtaining 20 to 30 percent of its profits from outside Australia and New Zealand by 2017. At the same time it aims to lift return on equity to 16 percent by 2016, from 15.5 percent this year.
East & Partners also cites analysts at other banks that are questioning whether ANZ’s plans are achievable. For example, Citi analyst Craig Williams said in a note to clients that ANZ’s plans to increase the share of profits made in Asia works against its overall target, because ANZ’s Asian businesses are currently less profitable than its domestic bank.
Yet, the temptation of international network growth captures every bank CEO’s imagination. In ANZ’s case it is the anticipated economic growth in key trade corridors within Asia, which will account for the majority portion of 35 percent of world trade by 2020, as the economic center of the world shifts back to Asia. This will result in key Asia-Pacific markets representing some $800bn in banking revenue by 2017, according to the Boston Consulting Group (see below). The trouble for banks, and not just ANZ, is that no one is ever alone in attempting to drink from this revenue pool (which also may not be growing quite as fast as thought last year), and in order to do so profitably, they have to be smart about it.