A special report on banking in emerging markets

AspecialreportonbankinginemergingmarketslMay15th2010TheymightbegiantsBankingEmergingMktsSRCOV.indd104/05/201014:15TheEconomistMay15th2010Aspecialreportonbankinginemergingmarkets1Emerging­marketbankshaveracedaheaddespitethe†nancialcrisisastheirWesterncolleagueshavelanguished.PatrickFoulisaskshowtheywillusetheirnew­foundstrengthbanksinthedevelopingworldnowmea­sureup.Notonlyaretheywellcapitalisedandwellfunded,theyarereallybig‹andareenjoyingrapidgrowth.Bypro†ts,Tier­1capital,dividendsandmarketvaluetheynowaccountforaquartertohalfoftheglobalbankingindustry.China’slendersheadthelistofbanksbymarketvalue,andBrazilianandRussianbanksareamongtheworld’stop25.AtcurrentgrowthratesIn­dia’sbankswillcatchupinadecade.ThecrisisinWesternbanking,stillreverberat­inginsouthernEurope,seemstohaveac­celeratedtheshiftinbankingmusclefromrichcountriestothedevelopingworld.Thisspecialreportwillarguethatmostofthatmusclewillbeneededathome.Tosupportthefastcreditgrowththeirpopula­tionsandpoliticiansdemand,andthebaddebtsitmaycause,emerging­marketbankswillneedmorecapitalthantheycangeneratefromretainedpro†ts.Theyarethepre­eminentgatherersofsavingsintheworld,amirrorimageofWesternbanksthatbecamehugeborrowers.Buttheywillstruggletousethoseexcessdepositsabroadwithouttakingdangerouscurren­cyrisks,sothejobofrecyclingexcesssav­ingsabroadwillremainwithcentralbanksandsovereign­wealthfunds.Themanag­ersofemerging­marketbankshaveplentytodoasitis.Someofthemalreadyrunor­ganisationsthatarefarbiggerthanthebig­gestWesternbanks.MostalsoexpecttolosecorporatecustomerstolocalbondALONGthebreezythree­kilometrestretchofMumbai’sMarineDriveyoupasscricketpitches,destitutepeople,luxu­ryhotels,plumpjoggersandadvertise­mentsforIndianmultinationalcompa­nies,butalmostnobankbranchesorcashmachines.Thatabsence,suggestsO.P.Bhatt,chairmanofStateBankofIndia,thecountry’sbiggestlender,givesthevisitorahintofthepotentialforthebankingindus­try.MarineDrivehasbeenunderbankedsinceitwasbuiltinthe1930s.ButnowthereisapalpablesenseinIndia,asinmostotheremergingeconomies,thatbankingisthriving‹justasithasfallenintodisreputeinmanyWesterncountries.Theemergingworldhasahistoryofvo­latilityandofbad­debtproblems‹indeedChinaisgrapplingwithsuchaproblematthemoment.Butdeveloping­countrybanksnowhavegotthingsrightonanum­beroffronts.Anti­povertycampaignerscanadmiretheire…ortstoo…erbankingservicestotheilliterate.Technologyguruscanseenewmobileapplicationsandlow­costITplatforms,andindustrialistscancountonbanksthatactuallywanttolendtotheir†rms.Regulationbu…sseeanin­dustrythatisbotharmour­platedandwrappedincottonwoolafterthecrisesofthelate1990sandearly2000s.Inmostemergingeconomiesbanksareviewedasenginesofdevelopmentratherthanasrent­seekingparasites.Butitisbythehardstu…,money,thatAnaudiointerviewwiththeauthorisatEconomist.com/audiovideo/specialreportsAlistofsourcesisatEconomist.com/specialreportsThebiggerandbiggerpictureThedevelopingworld’sbanksare‡ourishing.Page2Ramboincu…sBalance­sheetsarelesspowerfulthantheylook.Page5DomesticdutiesCCB,China’ssecond­biggestbank,exempli­†esthesizeofthetaskathome.Page7MutuallyassuredexistencePublicandprivatebankshavereachedamodusvivendi.Page8WeluckyfewForWestern†rmsthebarrierstoentryintoemerging­marketbankingaredaunting.Page10BreakingandenteringWhyitishardtocopySantander.Page12OldfriendsonlyTodowellinChina,Westernbanksneedalonghistory.Page14Alltheworld’sastageButemerging­marketbanksarestilltreadingcautiouslyabroad.Page15AdoortoAfricaStandardBankreapsthebene†tofboldthinking.Page16Crossyour†ngersEmerging­marketbankshavedoneremark­ablywell,buttheyneedallthelucktheycanget.Page17AlsointhissectionAcknowledgmentsInadditiontothosementionedinthetext,theauthorwouldliketothankthefollowingfortheirhelpinpreparingthisspecialreport:ShannonBell,SanjivChadha,JohnCheetham,WilliamCheng,CharudattaDeshpande,PaulEdwards,PeterGrei…,JamesGriˆths,PaulHarris,HuChangmiao,AngelaHui,NeerajJha,ErikLarsen,EdLin,PaulMarriott,LuciaPorto,HuwvanSteenis,SalinaTong,JonathanTracey,MilyaVeredandRahulVirkar.1Theymightbegiants2AspecialreportonbankinginemergingmarketsTheEconomistMay15th201021marketsandtohavetobuilduptheircon­sumer­andinvestment­bankingopera­tionstocompensate.Many,too,are†ndinginnovativewaystoo…erbankingservicestopoorpeoplewithoutlosingmoney.Ifthecrisishastransformedthestatusofemerging­marketbanks,ithasalsotransformedtheroleofthestateinbank­ing.InChina,whichhadbeenrelaxingitsgripontheindustryforadecade,thegov­ernmentdirectedthebankstocontinuelendingduring2008and2009‹themainreasonwhytheeconomycontinuedtogrowfast.InBrazil,IndiaandRussiathestatebankshaveseenasharpimprove­mentintheirfortunes,gainingmarketshareattheexpenseofprivatebanks.SomeWesternbanksoperatingindevel­opingcountrieshaveliveduptotheirrep­utationasunreliablepartners.Thatislike­lytohavelong­termconsequences.Thebankingsystemmostemergingeconomiesnowwantisamixofentrepreneurialpriv­ate†rmsandstatebanks,withafewwell­runforeignonestokeepthelocalshonest.ThathasbigimplicationsforthelonglistofWestern†rmsdesperatetogainmoreexposuretoemergingeconomies.Thecrisi