Many of the more successful approaches to date have been those which focus on specific geographies, markets or segments and attempt to build out organically from an initial foothold. Additionally many Western banks have focused on serving their home country multi-nationals as they expand in the region.
A further source of opportunities will follow reconfiguring and consolidation in Asian markets. Of the major 70–75 western banks operating in Asia, we believe that at least half will be challenged with critical mass or strategic direction issues and may decide in the end that they cannot succeed in building market presence in the region. Constraints and pressures ‘back home’ may also play a role. Regulation is becoming more demanding; capital requirements are more onerous; the domestic cash flow and profitability needed to underpin expansion in Asia are becoming harder to sustain. We believe that for a Western bank to become a major player in the region, it needs assets of US$100 billion. Banks which lack comparable resources, and which are suffering domestic constraints and pressures, may focus on a niche role, or pull back from initial footholds, potentially leaving operations behind which can be acquired.
In addition, some banking markets could face additional stress in the near future if domestic banks struggle, for example, to raise capital for Basel III, to fund themselves after years of reliance on interbank debt, or to continue under heavy margin pressure. This could result in M&A opportunities for opportunistic foreign banks. Strategic cooperation with local players, including JVs, could open another range of opportunities, although this is difficult to execute and needs a lot of management attention to be successful.
Despite the variety of influences and constraints, the fundamental fact is that for major Western banks with international scale and global aspirations, expansion in Asia is a necessity. Western banks will go into growth mode again and will seek scalability in Asia thus there really is little alternative but to find a way of penetrating the market.
In many markets – China and India for example – foreign owners are limited to minority equity stakes when acquiring existing banks.
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