International Expansion in the Banking Industry

The Banking industry is ever changing and versatile. Banks are constantly looking to adapt to the pressures they face, and one way to do so, is by adding or removing aspects of their international operations. Canadian offshore assets have increased by 38% in the last 10 years and there’s now over $1trn offshore in Chinese banks. Japanese and Indian banks have also seen an increase in their international operations. Meanwhile American and European banks are retrenching. There a number of positives and negatives when it comes to international expansion, below is a brief synopsis of some of the main points.

Why banks expand globally?

  • Client retention
    • Client retention is one of the biggest reasons for international expansion. Naturally, banks with a strong and positive reputation are more likely to retain and attract new customers. Finding solutions to existing client needs, even if that means navigating difficult regulation changes and operating in new areas, is an excellent way to build that kind of reputation. Operating internationally provides banks with further opportunities  for investing in differing markets.
  • Economies of scale
    • International expansion maximises production of procurement, systems, operations, research, and marketing and minimises the costs involved.
  • Geographic diversification
    • Unsurprisingly, international expansion mitigates against geographical market fluctuations, through geographic diversification. This puts the bank in a stronger position as it is part of several markets. Therefore, it is less likely to be negatively impacted by a single market downturn.

Difficulties with international expansion

  • Additional costs associated with country risk
    • Unexpected changes in the host country’s environment can result in additional costs for foreign firms. Anything from economic growth to national debt, inflation to exports can affect country risk and cause banks to make changes accordingly.
  • Differences in culture, language and economic development
    • Larger banks often find it easier to expand into new places, as international expansion is often complex and can be costly due to differences in culture, languages and economic development. These differences can reduce efficiency and present challenges, such as dealing with regulations and the sharing of information.
  • Political instability and risk
    • Political Risk is the exposure to the effects of foreign governments’ actions on the value of investment in the foreign country. Therefore, before expanding their operations internationally, banks need to have a clear picture of the political environment of a country. Political instability can discourage banks from staying in a country, as demonstrated by CaixaBank (see figure 1), following the Catalan referendum. Due to the economic uncertainty, resulting from the referendum, the bank’s share price dropped and caused them to relocate to Valencia.
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Figure 1

In short, changes in the global presence of banks are fuelled by a focus on the earning power of each country. Generally, banks should engage in international expansion, as it will allow them to reach a wider audience for their services, minimise transition costs, as well as diversify the sources of income. However, geographical expansion is more of a double- edged sword than previously thought, as banks will face additional operating costs, as well as face risks of political instability. Nonetheless, banks can still offset these potential risks by carefully choosing an adequate environment, which is not prone to political tensions (unlike the UK, which is still in the process of finalising its withdrawal from the EU).

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