Traditional banking leaders in the emerging markets are being displaced by a group of competitors armed with a powerful new advantage: access to US dollar (USD) funding. A new report from Greenwich Associates documents how US banks’ virtually unlimited access to this funding will give a powerful boost to banks such as Citi, JP Morgan and Bank of America Merrill Lynch (BofA Merrill).
The vast bulk of international trade and financing in the emerging markets continues to be conducted in USD. According to SWIFT, as of May 2012, 84% (by value) of all letters of credit (L/Cs) issued globally using SWIFT messaging was in USD. The currency’s dominance is even more pronounced in the emerging markets.
Historically, banks had three avenues to finance USD assets:
- USD retail deposits.
- USD corporate deposits.
- USD funding via loans, money market or bond markets.
The report notes that most European banks have traditionally relied on the third option – mainly money markets – for USD funding for structured finance, commodity and trade finance businesses in the emerging markets. This source has now disappeared entirely, or at least become so unreliable that banks consider it imprudent to build a business model upon it. These breakdowns are straining the emerging market business models of banks such as BNP Paribas and Société Générale (SocGen), which have traditionally dominated structured trade and commodity finance in the developing markets, and are placing other non-US competitors under increasing pressure.
For now, non-US banks are working to attract the USD deposits they need to fund these businesses by offering much more competitive corporate deposit rates and by building out cash management franchises in both the US and in the emerging markets. Robust cash management businesses in these areas already deliver relatively steady USD flows to banks such as HSBC, Standard Chartered Bank and Deutsche Bank. Virtually unlimited access to USD assets represents a huge and likely decisive advantage to US banks such as Citi, JP Morgan, BofA Merrill and, if it chooses to exploit the opportunity, the now domestically-focused Wells Fargo.
Securitisation: The Future of Emerging Markets Banking
Over a longer horizon, those banks’ emerging markets businesses will also benefit from their access to US institutional investors. Basel III rules, combined with reduced money market funding, virtually ensure that banks competing in the emerging markets will turn to end investors through the securitisation of bank finance facilities, loans and other forms of structured funding. As this process plays out, banks with strong institutional distribution capabilities in the US, including some non-US banks such as Deutsche Bank, will gain another powerful advantage in the emerging markets.
Winners and Losers
Greenwich Associates presents the following breakdown of how the competitive landscape in emerging markets wholesale banking will evolve over the next five years – primarily in Asia, but also in other developing regions where limited variation will occur.
Winners: BofA Merrill, Citi, Deutsche Bank, HSBC, JP Morgan, and Standard Chartered Bank
The combination of strong, deposit-gathering cash management businesses and institutional USD distribution will put these six banks at a clear advantage to competitors over the next five years.
Losers: Crédit Agricole, CIB, ING, SocGen, UniCredit, and possibly BBVA and Santander
These mid-sized banks lack either a strong transaction bank in emerging markets or strong institutional distribution capabilities outside Europe, leaving them at a potentially fatal disadvantage in an era of reduced USD funding.
Too soon to say: ANZ Bank, BNP Paribas, DBS Bank, and RBS
These banks all have significant emerging markets franchises and are trying to build out both their cash management platforms and their institutional USD distribution capabilities. However, Greenwich Associates data shows that these banks lag global leaders by a sizable margin in both areas – and they have only limited time to close those gaps.
On the deposit side, while European banks have experienced a series of well-publicised withdrawals in recent months, other emerging markets competitors are also feeling pressure. Specifically, despite the generally favourable aggregate loan-to-deposit ratios of Asian banks, the loan-to-deposit ratios within USD books are well above 100% at local banks in countries such as Australia, South Korea, Thailand, and Singapore. While these banks have yet to experience significant problems as a result, senior executives are considering how to render their USD funding more resilient.
Cautious growth: Korea Exchange Bank, Bank of China and HDFC
The gradual adoption of local currencies – mainly the RMB – for international transactions will over time free these banks from the constraints that come with funding USD assets. While time might well be on the side of these local competitors, the shift to local currencies will not be enough to offset the existing USD advantage of foreign rivals within the next five years.
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