Banks Face Challenges for Global Expansion

Globalization is a key issue for many Korean companies and increasingly more so for Korean banks, which often announce plans for international expansion.

By Noh Chan
Managing Director & Head of International Group at Korea Exchange Bank

Globalization is a key issue for many Korean companies and increasingly more so for Korean banks, which often announce plans for international expansion.

This trend can be seen in several figures such as the number of overseas networks, overseas assets and net profits. In terms of Korean banks' overseas assets, the figure is recovering from the financial crisis in 1997 and has been steadily increasing since 2001 to reach $34.4 billion in 2006. The number of overseas networks is another figure that is recovering.

Currently KEB has the highest number of overseas networks at 26, followed by Woori's 18 and Shinhan's 16. Additionally this year, many of the banks have announced to aggressive expansion plans, especially in countries such as China and Vietnam.

With this growths, Korean banks' total net profit from overseas business turned positive in 2001 and reached $400 million in 2006.

Why are Korean banks putting more effort into global expansion? What's driving this?

There are many reasons but they can be summarized into three main. First is the limited growth option on the domestic market. Most banking products are becoming mature and the industry is rapidly consolidating in Korea.

Second is the substantial market growth outside Korea. Relative to the Korean banking industry, there are emerging giants such as China and India where the banking sector is projected to grow at around 15 percent annually until 2011.

Given these growth projection in Asian markets, many global and regional leading banks such as HSBC, Citi and SCB are aggressively expanding through alliances with local banks in markets like China, Vietnam and Indonesia.

The third reason is the increasing need for integrated regional and global services from the existing Korean customer base. Korean companies are globalizing and need more advanced and integrated services, which global banks with large global networks are much better positioned to provide.

Global banks are moving in line with these changing customer needs, posing a threat to Korean banks. For example, SCB has set up a ``Korean desks'' in eight countries to serve Korean companies and communities.

Therefore, even just to defend their core customer base, Korean banks need to expand internationally and enhance their global capabilities. For Korean banks globalization is no longer a peripheral issue but increasingly becoming a matter of survival.

However, in light of these needs for globalization, Korean banks still have a long way to go.

The majority of the business is still domestic and the international portion is minimal. For instance the average percent of overseas assets out of total assets for leading Korean banks is only 4 percent compared to 20 percent for BOC, 33 percent for DBS, 56 percent for Citi, 57 percent for HSBC and 84 percent for SCB. It is quite challenging for Korean banks to globalize given their limited experience and resources.

How can Korean banks successfully globalize? It is critical for Korean banks to devise a thoughtful global expansion strategy.

The global expansion strategy needs to address the following four key questions.

1) What business models need to be considered for optimal size/growth?

2) What are the most attractive and feasible focus regions/countries to penetrate?

3) What is the evolution path for the successful implementation of the ultimate business model and what are the specific methodologies for this transition?

4) What efforts and internal capabilities are required for successful implementation?

On the question of business model, looking at various expansion models of which there are five. One is ``follow your customer,'' which is expanding through serving your existing customers' overseas needs. The ``Community banking'' model is serving Korean retail communities in markets where there are a large number of Korean immigrants and communities. ICICI's growth through serving Indian communities overseas is an example of this model.

The third model is ``product-segment specialist'' where banks decide to expand internationally focusing on a particular product and a segment in which the bank has distinctiveness so that it can be a leader in that particular product or customer segment. UBS in asset management is an example.

Fourth is ``high growth market with affinity,'' which is expanding into high growth markets that have some affinity. Santandar Bank, one of the leading banks in Spain, expanded into several countries in Latin America such as Mexico, Venezuela, Chile and Brazil to leverage their linguistic and cultural affinity.

Lastly is a model of ``global competitive matching'' where you decide to expand into important markets that you must cover to be a meaningful global player and/or match major competitors' scale and coverage.

On the issue of picking the right market, this issue is important for strategy development for all industries but is more important for financial institutions. Banks need to carefully select the right market considering the potential size and growth of the market profit pool and feasibility such as regulatory barriers and competitive dynamics.

In order to implement the business model in the selected countries, banks need to think about how to get there. Organic growth versus inorganic growth is a key question that is driven by many factors such as current capabilities, availability of deals and how much capital you are willing to put at risk.

Lastly on the issue of initiatives and capabilities required, it is important to develop a set of initiatives for building the capabilities, infrastructure and systems along with business initiatives to implement the business model.

The required initiatives and capabilities are dependent on the target regions, business models and growth paths. To pursue conservative organic growth, securing global competitiveness in domestic operations, understanding local markets, and the establishment of cooperation with strategic partners are crucial.

On the other hand, for aggressive inorganic growth, M& A capabilities, fast decision making, securing local management teams and an effective governance system for multiple overseas business are important.

The importance of globalization will only grow but this is something that you cannot just rush given the significant challenges and its complexity. Korean banks will have to develop well thought international expansion strategies to overcome the challenges and grow into truly international players.