Article image

Returning to Form: Banking in BRIC Markets

March 05, 2010 by Ranu Dayal, Lars-Uwe Luther, Peter Neu, and Tjun Tang
LIKE. FOLLOW. SHARE.
Related Articles
In This Article

This article is part of BCG's eighth annual study of shareholder value creation in banking, After the Storm: Creating Value in Banking 2010.

  • The banking industries in the BRIC markets staged a remarkable recovery in 2009.

  • The impact of the crisis on BRIC banks had less to do with underlying problems in their financial sectors and more to do with adjustments to extremely high market values.

  • Banks in the BRIC countries benefited from the conservative leanings of both their business models and their local environments.

 

The term BRIC, which was coined more than eight years ago, has endured largely because the BRIC economies are still regarded as dynamic and increasingly important. In fact, the World Bank recently estimated that these countries will be among the world’s five largest economies by 2050. Given the link between GDP growth and the growth of banking, their banking markets are certain to become even more prominent on the world stage.

The banking industries in the BRIC markets staged a remarkable recovery in 2009. Their combined total shareholder return (TSR) climbed to 85 percent, up from –53 percent in 2008. These countries exemplify the dynamic half of the two-speed world, but the turnaround in banking performance was driven by more than exceptional GDP growth.

For starters, the impact of the crisis on BRIC banks had less to do with underlying problems in their financial sectors, such as direct exposure to U.S. subprime mortgages, and more to do with adjustments to extremely high market values. In addition, banks in the BRIC countries benefited from the conservative leanings of both their business models and their local environments. Finally, some of the most prominent banks in these markets have spent years developing competitive capabilities and practices. Several BRIC companies were among the top-performing banks, measured by relative total shareholder return (RTSR), which means that they outperformed both their peers and their local markets.

  • Brazil. In 2009, Brazil’s banking industry had a TSR of 65 percent. Its performance was driven as much by business fundamentals as it was by the relatively buoyant economy. Banks, in general, have healthy balance sheets, with capital ratios of at least 15 percent, and loans have grown at a steady rate. Improved expectations for both the economy and the banking industry have led to higher price-to-book multiples. Crowning a successful year for the banking industry, Banco Santander’s local operation raised $7 billion in October—it was the largest IPO in the world in 2009—and Brazil’s largest nonstate banks, Itaú Unibanco and Banco Bradesco, moved up in the ranking of the largest banks worldwide, measured by market capitalization. Having achieved strong growth and profitability locally, leading banks are starting to focus on opportunities to expand within and even beyond the region.

  • Russia. Russia’s banking industry had a TSR of 185 percent in 2009. The landscape is dominated by Sberbank, which accounted for two-thirds of the industry’s market capitalization in 2009. The bank has an outsize presence. It is the dominant deposit taker in Russia, as well as one of the few banks in the market that would not need to slash its risk-weighted assets for funding reasons. And with its extensive distribution network—it accounts for nearly one in three banking outlets—Sberbank has benefited significantly from government initiatives to bolster the mortgage and car loan sectors. Even as demand was falling, the bank managed to gain market share. The bank has also benefited from its own improvement initiatives. A restructuring program, which began a year and a half ago, has started to show tangible results.

  • India. The TSR of India’s banking industry climbed to 84 percent in 2009, a turnaround of more than 120 percentage points from 2008. Indian banks have grown in tandem with the economy. State Bank of India, which had an average annual RTSR of about 9 percent from 2005 through 2009, entered the ranks of the 50 largest banks in the world in 2009, benefiting from a significant inflow of deposits during the crisis. Two other institutions, HDFC and HDFC Bank, delivered five-year TSRs that were more than 5 percentage points higher than the performance of the Indian stock market. While ICICI Bank recovered some of the ground it lost to other Indian banks in 2009, it ended up with a five-year TSR that was essentially in line with the broader Indian stock market.

  • China. In 2009, China’s banking industry had a TSR of 68 percent and accounted for three of the world’s five largest banks, measured by market capitalization. Across the banking industry, lending surged in 2009. New loans reached RMB 9.6 trillion ($1.4 trillion), an increase of 34 percent for the year. This credit expansion was sparked by the government’s loose monetary policy and massive stimulus plan, both of which helped the economy grow by 8.7 percent and allowed banks to continue growing profits. But the expansion of credit, coupled with expectations of a more cautious regulatory approach, has led to concerns that banks will need to raise capital in the coming months. In fact, 2010 is likely to present several challenges, as authorities rein in bank lending—particularly in sectors at risk of overheating, such as property—and as loan loss provisions begin to rise.

Despite these challenges, leading Chinese banks are expected to maintain their profitability by relying on balance sheet lending to large domestic clients, reinforcing risk controls, and enhancing their retail and wealth offerings. Some will also gravitate toward universal banking (within the limits of regulations) by investing in trust companies, asset managers, and insurance companies.