Banking across borders: Cases of internationalization of retail banks

Introduction

This article explores the international expansion of banks. Although there are large institutions with banking operations in many countries, a specific segment in banking – the retail business – evidences the difficulties of internationalization of financial services. For example, until the 1990s, international expansion was not common in retail. Except when serving ethnic communities, foreign banks were not expected to have any advantage over local banks, which were more familiar with the local regulations, environments, culture and customer´s demand. Historically, Citigroup was practically the sole bank to pursue a global retail strategy, focusing on a niche, upper-income markets. However, the 1990s saw a surge in financial globalization and multinational banking gained momentum. Foreign entry was in Eastern Europe and Latin America, while it was comparatively slow in Asia. Spanish banks, for instance, heavily expanded foreign operations during the 1990s and 2000s, particularly to Latin American countries. Banking crises, deregulation, and reductions of foreign entry restrictions are the major catalysts of the increased penetration of foreign banks in some emerging markets. (Nicolò, Bartholomew, Zaman, Zephirin, 2004).

Claudio Conti (FGV), and Felipe Monteiro (INSEAD) remind that only recently banks from emerging countries had engaged in a similar internationalization effort, although more cautiously, following the increasing participation of emerging countries in global trade, economy and foreign direct investment. For instance, some Russian banks such as VTB, Sberbank, and Alfa-bank entered not only in the former CIS countries but also in Western Europe, China and India.  Chinese banks such as CITIC, Merchants, and ICBC invested in acquisitions mainly in Hong Kong, Macau and South Africa, while other financial institutions focused on Western Europe and the United States. Minsheng presents a particular case when acquired a stake in the US-based UCBH Bank, which focused on Chinese clients in San Francisco as a primer for international expansion. However, the deal did not turn out as expected as UCBH was shut down in 2012 (Conti, Monteiro, 2014). Three cases of internationalization of banks are presented below. First the Santander case, a successful story of a retail bank that became global. Second, the international expansion Itaú-Unibanco, a private bank. Finally, the ups and downs of the international expansion of a large, Brazilian state-owned financial institution.

The case of Santander in Latin America

 Santander is considered to be a successful case of the international expansion of a retail bank. After becoming the largest Spanish financial institution due to its an aggressive acquisition strategy during the consolidation of Spain´s financial system, the bank perceived that the firm had to look for opportunities outside its home country, mainly because the Spanish market was already mature, leading to low margins. The Latin region became an obvious target due to the privatization wave of the 1990s, the low banking penetration in LA, the cultural and linguistic proximity and the high-margins offered by the banking system in that region. After the acquisition of 28 banks in Latin America, Santander could take advantage of its strengths in new product development, marketing, and information technology. As a consequence, Santander emerged as the world’s 10th largest financial institution – and one of the most efficient and lucrative.

Santander´s international expansion is an example of Push Factors of internationalization because the constraints (maturity, the limited opportunity of growth and low margins) pushed companies away from home to look for opportunities abroad.

The case of Itaú-Unibanco 

Itaú-Unibanco is a family-controlled, publicly quoted bank from Brazil, listed in Brazil and in the US. It is currently the biggest Latin American bank by assets and currently serves around 48 million clients in its retail banking unit. It has subsidiaries and representative offices in Argentina, Chile, Colombia, Panama, Paraguay, United States and Uruguay in the Americas; in the United Kingdom, Luxembourg and Portugal in Europe; Japan, China, and Hong Kong in Asia, and in the United Arab Emirates in the Middle East (Itaú-Unibanco, 2018).

Throughout his story, the acquisitions of smaller, non-performing banks were an important part of Itaú-Unibanco growth strategy, a “buy and integrate” mode. For example, the merge with Banco Aliança (1973), Banco Português do Brasil (1974), Banco União Commercial (1974), the acquisition of the retail banking unit of Credit Lyonnais and the several state banks during Brazil´s privatization wave of underperforming banks: BANERJ (1997), BEMGE (1998), Banestado (2000), and BEG (2001). In 2002, Banco Itaú acquired Banco BBA-Creditanstalt to create, in 2003, Banco Itaú-BBA, the largest wholesale bank in Brazil. In 2002, Itau also acquired Banco Fiat, In April 2006, Itaú purchased the Brazilian operations of BankBoston, and in 2009 the third largest Brazilian banking group at that time, Unibanco, creating the Itaú-Unibanco conglomerate.

Itaú-Unibanco´s Strategy

Regarding its international expansion, Itaú-Unibanco is arguably the most internationalized Brazilian financial institutions because it has several branches in 20 countries. It is particularly strong in Latin America, where it offered a wide range of retail products. Highlights of the bank’s business in the region include leadership in the card business in Paraguay and Uruguay and its status as a top 10 brand for financial services in Argentina. Itaú-Unibanco had 88 branches in Chile, 81 in Argentina, 27 in Paraguay, and 22 in Uruguay. Operations in Peru, Colombia, and Mexico were limited. The organization also operates in several countries in Europe (Portugal, United Kingdom, Switzerland, and Luxembourg), in the USA and in the Caribbean (the Cayman Islands and the Bahamas), in wholesale segments such as corporate and investment banking, capital markets and private banking (Itaú-Unibanco, 2018)

The internationalization process of Itaú started in the late 70s, several decades Itau´s foundation, to support its strategy of becoming a universal bank, with many business units and financial solutions to companies, governments, and customers. Table 1 presents the main events of Itaú-Unibanco´s international expansion.

Table 1. Timeline of ITAU-Unibanco international expansion

Source: (Itaú-Unibanco 2018)

Several aspects can be noticed from the internationalization process of Itaú-Unibanco. First, the low speed of its international expansion. The bank´s international expansion suggests that the organization is not only conservative but also more preoccupied with the assurance of a successful integration than the velocity of its international expansion. Second, there is the focus in Latin American markets, which is an indication that Itaú-Unibanco follows the Uppsala model of international expansion, which advocates that firms gradually expand into culturally and geographically close foreign markets. Third, the organization opted to expand through acquisitions, in order to obtain economies of scale to counterbalance the huge investments in IT, a requirement for the operation of a profitable retail banking business. Overall, the international expansion strategy of the bank suggests a replication of the conservative “buy and integrate” mode the bank used in the expansion in its home country.

The case of Banco do Brasil

For more than 2 centuries, Banco do Brasil (BB) had operated in Brazil and overseas, with more than 5,200 branches. BB was the leading financial institution in Brazil and Latin America. However, BB has a timid international expansion.

Banco do Brasil´s strategy

Despite being a pioneer in international expansion among Latin American banks, having opened its first branch abroad in 1890, the bank presents a timid internationalization trajectory, alternating between periods of expansion and contraction. The main reason for such behavior is that Banco do Brasil´s international expansion is a textbook example of internationalization process originated by Pull Factors, that triggered BB´s foreign expansion, such as the World War II, the flow of Brazilian immigrants to Japan and the US (targeting ethnic markets), the increase of foreign trade and the boom of commodities, geopolitical interest of the Brazilian government, and the global events (the World Cup and the Olympic Games).

BB’s long and difficult internationalization trajectory can be used to compare emergent vs. deliberate strategies, in comparison to the one of Itaú-Unibanco. Two characteristics can be noted (Conti, Monteiro, 2014):

1. BB’s initial strategy was emergent, maybe because it was a pioneer in foreign expansion at a time when strategic planning and international business were not as developed as today. Rather than consistently expanding according to a plan, Banco do Brasil took advantage of ad hoc opportunities, such as its entry in Italy in 1944 in the wake of Brazilian troops – alternating waves of expansion and contraction.
2. More recently, BB has developed a more consistent plan that demonstrates awareness of economic developments and knowledge of international business theories, such as entering in markets with short psychologic distance (Ghemawat, 2001).

Conclusions

Should I stay or should I go?

Growing globalization had increased business transactions across borders, creating opportunities for the business of banking. Although retail banking does not seem particularly suitable for global expansion due to the importance of local idiosyncrasies, a few organizations from North America and Europe are already big global players and Santander had been an internationalization success story since the 1990s. Banks from emerging countries such as Brazil, China, and Russia presented an initiative to expand internationally, although with a regional focus and facing ups and downs in their strategies. These institutions learned the hard way that many times the foreign expansion is an attractive option, but not the only strategic movement available because the incentives for financial firms to expand internationally depend on perceived profit opportunities relative to those available in domestic markets, as well as the regulatory environment of the host country.

Where to go?

After deciding where to go, executives should select the foreign markets they should enter, a developed or an emerging one. On the one hand, developed markets host large numbers of individuals with high disposable income and headquarter many of the world’s largest corporations. However, these same characteristics attract a large number of competitors, resulting in fierce competition among the players in this industry. On the other hand, emerging markets, particularly in Asia and Latin America, have increased their participation in world trade and foreign investment. However, these economies offer higher risks compared to the ones presented by mature markets.

Managerial implications

The three cases briefly discussed in this article explain that internationalization is not an easy task, even for a large company with a well-conceived strategy. It happens because the firms should evaluate important aspects such as psychological distance, market relevance, and attractiveness. Indeed, it tends to be a long and difficult process, in part because competences that guarantee success at home are not necessarily transferable to environments abroad.

References

Conti, C. R., & Monteiro, L. F. (2014). Banco do Brasil: From Brazil to the World.

De Nicolò, G., Bartholomew, P., Zaman, J., & Zephirin, M. (2004). Bank consolidation, internationalization, and conglomeration: Trends and implications for financial risk. Financial markets, institutions & instruments, 13(4), 173-217.

Ghemawat, P. (2001). Distance still matters. Harvard business review, 79(8), 137-147.

Itau Unibanco (2018). Institutional Presentation. Retrieved from https://www.itau.com.br/relacoes-com-investidores/default.aspx?linguagem=en

Slager, A. (2005). Internationalization of banks: Strategic patterns and performance (No. 2005/4). SUERF Studies.