INTERNATIONAL BUSINESS EXPANSION REPORT

Executive Summary

Introduction

The primary objective of this report is to recommend how the bank can expand internationally and how it can penetrate into the markets of the concerned countries. This report is meant for conveying the CEO of the reputed Australian bank about the bank’s chances and opportunities to grow and expand in the markets of France, Brazil, and Korea. Though the bank has already expanded its business across Australia and New Zealand with commendable success, the upper management is now willing to extend the success internationally. Hence, this report would discuss about the prospects that in terms of the bank’s international expansion and it would also recommend the steps that the bank must step in order to accomplish the objective of international expansion.

Background

A major Australian Bank is eyeing at strategic formulation of international expansion. The company has developed a reputable brand in the Australian and New Zealand markets and is now looking for suitable acquisitions and strategic partnerships in foreign markets for the sake of growing their business. The Bank’s objective is to flourish in the international markets and it has targeted France, Brazil, and Korea as the entry points. In this report assessment would be made about the attractiveness of each market and then recommendations for future actions would be provided.

International Expansion Strategy

If the Australian Bank is looking to expand the business beyond Australia and New Zealand then the effective management of the Bank’s international growth will thoroughly rely on the ability of the top management to design and implement an appropriate international strategy that would support their growth objectives. The Bank’s top management should be aware of the fact that global expansion requires structures and management processes to gradually adapt to unfamiliar business environments. In this respect a keen understanding of the global and the targeted regional economy is quite important for building a sustainable international business. Moreover, the bank needs the quality and potential of adaptability so that it can adapt quickly to the changing regional scenarios in the foreign markets. Another strategy which is needed to expand globally is to develop strategies for local relevance but having global scale and this strategy involves the decision making in respect of determining how much to cater to local preferences and this estimation again needs a thorough knowledge and understanding of the consumer demographics, preferences and consumer behavior in the target markets and within the target segments. The bank has to decide on how to tailor its products according to the need and choice of the customer segment in the foreign markets and such understanding is very much essential to expand globally through penetrating foreign markets like France, Brazil and Korea. Moreover, doing the bank’s due diligence is an essential part of the international expansion strategy. The major Australian Bank should keep in mind the fact that what works well in stable and mature market economies like Australia and New Zealand might not work as steadily in markets in Korea or Brazil. If the Bank is willing to expand its business in France, Brazil and Korea then it has to be very much aware of the business culture of the concerned countries and it has also to become acquainted with the risk factors prevailing in the market. Moreover, communicating and coordinating effectively in the foreign markets is an essential criterion in terms of expanding the business internationally. A clear channel of communication between the bank’s headquarters and the regional branches must be established in a thorough manner to maintain and sustain transparency in the communication process. This transparency and clarity in the communication process ensures the exchange of clear objectives between the headquarters and the regional branches. Such coordination and clear communication is going to deliver positive results undoubtedly. Furthermore, choosing the right partner in terms of business expansion is an important aspect when it comes to spreading and expanding the business on a global basis. It must be taken into account that small misunderstandings can eventually cause delays in paper works and this might affect on the proceedings of the business.

Condition of Banking Industry in France

One of the main economic assets of France is its banking sector (according to the OECD). In 2017 the French banking industry constituted of 364 banks and according to the European Banking Authority (EBA), “six French banks are among the Global Systematically Important Banks (G-SIBs). Financial firms account for 4.5% of total value added in France, of which approximately 60% comes from the banking industry” (EBF, 2018). In France, more than 370,000 individuals had been employed at the end of 2015 and this represented 2.3% of the private workforce in mainland France (EBF, 2018). It must be noted that the “results of the combined asset quality assessment and stress testing, conducted by the EBA and the European Central Bank, demonstrate the high level of capitalisation of French banks. The aggregate common equity Tier 1 capital (CET1) of French banks, calculated according to CRD IV/CRR rules, stands at 13.6% at the end of 2016, which places them among the most resilient banks in the euro area” (EBF, 2018). But it must be noted that French banks are dealing with a growing number of international and European regulatory requirements and that has caused a heavier tax burdens (EBF, 2018). There have been several regulatory changes and advancements made in the technology that are prompting French banks for transforming and adjusting their models for financing the economy. So, those are the hurdles which the French banking system has to overcome, but despite such hurdles “French banks continue to finance businesses and households. At the end of March 2017, outstanding loans to the economy stood at €2,203 billion, up 5.2% year-on-year” (EBF, 2018). One important aspect that has to be keep in mind in terms of the French banking sector is that, in France, businesses are increasingly using the financial markets and banks are obliged to help them find new sources of financing” (EBF, 2018). This can provide the Australian Bank with a chance to capitalize on the prevalent condition. It is noteworthy that “Out of total corporate financing of €1,522 billion as of the end of March 2017, the proportion of bank lending to market financing was 60%/40%, compared to 70%/30% at the end of 2009” (EBF, 2018).

Condition of the Banking Industry in Brazil

The Brazilian banking industry has gradually been flourishing on a gradual basis. It has evolved into one of the most efficient banking systems of the world. Electronic banking is provided by almost every bank in Brazil and the bank branches are numerous and almost every city in the country have at least one major bank branch. The five largest banks in Brazil have approximately 15,000 branches across the country (export.gov, n.d,), and international operations are centralized at the bank’s headquarters in either Sao Paolo or Rio de Janeiro. But it must be noted that important trade functions are carried on by different branches located at different cities in Brazil. Quite interestingly, all Brazilian banks have a number of correspondent banks around the world (export.gov, n.d.). There are 50 top banks in Brazil and 20 of them are foreign owned (export.gov, n.d.). USA has 6 banks in Brazil, Germany has 1 bank, the Netherlands has 2 banks, U.K. has 1 bank, France has 3 banks, Spain, Switzerland and Bahrain has 1 bank each whereas Canada has 1 bank and Japan has 3 banks (export.gov, n.d.). But it must be noted that there are some crises that the banking sector in Brazil have been facing. For an instance, a rise in macroeconomic and credit risks has contributed to a downgrade to the BB-rating band. It is amid money tightening and recession that credit growth has slowed to 9.9% but eventually propped up by lending from public banks and by loans in the lending segment that has been directed and this accounts for just under half of total loan (The Economist, 2015). The commercial lending rates are gradually picking up and have been lifting the commercial lending areas (The Economist, 2015). Financial soundness indicators though are adequate, the economic and credit risks have been on the rise and it must also be noted that “The non-performing loan (NPL) ratio (loans overdue by 90 days or more) stood at 3% in July, which is moderate and down from an average of 3.8% in 2012, but partly reflects renegotiations of souring debts” (The Economist, 2015). Moreover, there are some positive factors in respect of the banking sector in Brazil. Regulation and supervision are strong, “and banks have well developed credit risk management systems” (The Economist, 2015). But there are negative factors too. For an instance, more than larger domestic banks, medium-sized banks are more dependent on funding from wholesale markets and that is one reason why such banks are exposed to liquidity risk (The Economist 2015). Moreover, if the rating outlook is considered it can be seen that the non-performing loan (NPL) ratio stood at 3% in July, which should be deemed moderate and down from an average of 3.8% in 2012, but this again partly reflects negotiations of souring debts (The Economist, 2015).

Condition of the Banking Industry in Korea and Recommendation

The banking sector in Korea is going through a mixed situation. The country’s bank’s profitability has improved recently but in a low interest –rate environment is prevailing in a mature market (The Economist, 2017). The banking industry in Korea is facing competitive and regulatory pressures on a domestic basis and the arrival of two internet banks have disrupted the competition and this is also because technology and mobile savvy individuals are quickly adopting smartphone banking. On the other hand the bank regulatory bodies are concerned with the rise in the household debt levels (The Economist, 2017). It is noteworthy that the earnings of South Korean banks grew sharply in the first half of 2017, “with sector-wide net income surging by 171.4% to W8.1 trn (US$7.1bn), from a year ago, according to the Financial Supervisory Service (FSS), a local financial regulator” (The Economist, 2017). It has also been observed that the rise of pure-play internet banks is actually threatening to compress the profit margins for the conventional banks and simultaneously the regulatory climate of household debt is deleveraging adds long-term strains on the existing balance sheets” (The Economist, 2017). Moreover, the rise of internet banks has become a reality for Korean banking sector which is putting the conventional banking system on the verge of stake. The status and condition of online banking in Korea is as follows:
K-Bank and Kakao Bank have so far attracted about 2.5m accounts between them, compared with about 155,000 new online accounts opened at all South Korean banks throughout last year. More internet only banks will come in the pipeline as legislative bills pending in the National Assembly (the legislature) are seeking to remove a key obstacle to the diffusion of financial technology, or fintech. This would amend the Banking Act in order to raise technology companies' ownership limit to 50%, from the current 10% ceiling. The equity participation in K-Bank of KT, a local telecom operator, is currently 8%, and the stake of Kakao, a social media firm, in Kakao Bank remains capped at 10%. (The Economist, 2017)
This shows that in the competitive banking industry of Korea the internet banking is gradually dominating the scenario and this could be an opportunity of the Australian bank that is endeavouring to get into the Korean banking market. It should be noted that due to the emergence of online banking in Korea, the traditional branch banking system is on the verge of decline. Traditional banks in Korea are now forced to shut down their physical branches and they are now moving towards online and mobile banking channels. It has been predicted that this transformation from conventional to e-banking would be accelerating and this may provide an opportunity for the Australian bank to penetrate the market with a different strategy. The Australian bank may take the opportunity of this shifting trend because quite recently KEB Hana Bank, one of the largest commercial banks in Korea, declared that it would be shutting down about 70 branches out of its 800 branches in 2017 and Citibank Korea is planning to close 90 of its 126 remaining branches by the end of 2017 (The Economist, 2017).

The Attractiveness of the French Banking Market for the Australian Bank and Recommendation

There is quite an opportunity for the Australian Bank to expand to France’s banking sector. There are some signs and symbols that are pointers to the fact that eh Australian Bank might be benefitted by expanding to the French banking sector. In the context of the French banking sector it has been observed that the banks are keen to provide loans to SMEs that are the primary beneficiaries of bank lending. In March 2017, 42% of total loans were granted to businesses and they were actually SMEs (EBF, 2018). So, it can be observed that the French banking sector is inclined towards providing more loans to business sectors and establishment. And for doing so they need foreign collaboration in the way of inviting foreign banks to invest in the French banking sector. This would pave a great way for the Australian Bank to enter the French banking sector to add to the strength of the sector in disbursing loan to SMEs. Though the demand of loan has been a bit low in 2017, it has been predicted that with the establishment of new SMEs and other businesses in France the demand for loan would be increasing in the long run, making it easier for the Australian bank to offer its help to the French banking sector (while maintaining its own profitability in terms of business expansion to international markets). It must also be noted that “French banks also actively finance the projects of French personal customers. Outstanding household loans stood at €1,112 billion at the end of March 2017, up 5.6% year –on-year. Most household loans were home loans, representing 914 billion euros” (EBF, 2018). This also gives an opportunity to the Australian Bank to enter the French market to share the burden of the loans that the banks are giving to the household sectors. In this way also the Australian Bank can appease the French banking authorities to give it permission to operate in France in a smoother manner. It should be noted that, in France, businesses are increasingly using the financial markets and banks are happy to help them find new sources of financing (EBF, 2018). In such a scenario it would be a great opportunity for the Australian Bank to knock the door of France’s banking sector to contribute to the strength of the French banking system in helping the businesses find financial sources for carrying on with their operations.

The Attractiveness of the Brazilian Banking Market for the Australian Bank and Recommendation

The Brazilian banking industry has gradually been flourishing on a gradual basis. It has evolved into one of the most efficient banking systems of the world. Electronic banking is provided by almost every bank in Brazil and the bank branches are numerous and almost every city in the country have at least one major bank branch.The Brazilian banking sector is an enriched one with more growth and expansion expected. The Brazilian banking industry is flourishing on a gradual basis and the electronic banking system that the country’s banks are providing also provide an opportunity to the Australian bank to penetrate into the Brazilian market with all its innovative banking systems. Already, allured by the economic importance of Brazil’s growing market several foreign banks have opened their representative offices and even branches in different cities of Brazil. Such banks offer consumer banking services in Brazil. The Australian Bank should follow the trend and try to fill up the gap remaining for the foreign banks to make its hold in the Brazilian banking sector. The Australian Bank should eye at opening offices and branches in Sao Paolo city’s Paulista Avenue and Brooklin and Itaim Bibi areas where there is the concentration of foreign bank offices which provide investment services but not banking services. In such areas, the Australian bank could start providing both investment and banking services for the Brazilian consumers. It must be noted that banks from many continents have already established their offices and branches in Brazil. For an instance, Africa has the last number of representatives in Brazil with only Banco Standard de Investimentos S/A and Standard Chartered Bank (Brasil) S/A Banco de Investmento (Novais, 2013). American banks have a high concentration in Brazil with banks like Bank of American Merrill Lynch, Banco Cargill, Banco Commercial Investment Trust do Brasil S/A, Ernst & Young Terco Auditores Independentes S/S/, Goldman Sachs to Brasil Banco Multiplo S/A, J.P. Morgan, Banco Morgan Stanley, Bank of New York Mellon, Philadelphia National, RBC Brasil Distributor de Titulos e Valores Mobiliarios (Royal Bank of Canada), Union Bank of California Servicos Ltda, and Western Union S.A. (Novais, 2013). South American Banks also have their presence in Brazil like Interbank Peru Repres. E Part. Brasil Ltda, Banco de La Nacion Argentina, Banco de La Provinica de Buenos Aires, Banco de La Republica Oriental del Uruguay, etc (Novais, 2013). Asian banks have also made their way into Brazil like Banco ABC-Brasil S/A, Bank of China Brasil, Banco KEB do Brasil S/A, Mizuho Corporate Bank, Banco Sumitomo Mitsui Brasileiro S/A, Banco de Tokyo-Mitsubishi UFJ Brasil SA/, and Banco Woori Bank do Brasil S/A (Novais, 2013). Moreover, strongly present in Brazil, the European banks have made their profit-making way easier by setting up their branches and offices in Brazil. There are myriads of European banks in Brazil like Banco Barclays S/A, Banif – Banco Internacional do Funchal (Brasil) S/A, Banco de Investimentos Credit Suisse (Brasil) S/A, BNP Paribas, BPN Brasil, Banco Rabobank International Brasil S/A, Banco Santander, Banco Societe Generale Brasil S/A, Banco Sadabell S/A, Banco Volkswagen S/A, Banco West LB do Brasil S/A, CIC do Brasil – Credit Industriel et Commercial Consultoria Financeira Ltda, Credit Suisse Hedging-Griffo Corretora de Valores S/A, Deloitte Touche Tohmatsu Consultores Ltda, Deutsche Bank S/A, HSBC, ING Bank NV, etc (Novais, 2013). Hence, it can be seen that Australian banks are there to yet fulfil the banking sector of Brazil. If judged from this perspective it can be said that the reputed Australian Bank has the opportunity to represent the continent by setting up its offices and branches in Brazil.

Conclusion

References

EBF (2018). France’s banking sector: Facts & Figures. Retrieved February 2, 2018, from https://www.ebf.eu/about-us/france/
Export.gov (n.d.). Brazil – Banking Systems. Retrieved February 3, 2018, from https://www.export.gov/article?id=Brazil-Banking-Systems
Novais, A. (2013). Foreign banks with offices in Brazil. Retrieved February 3, 2018, from http://thebrazilbusiness.com/article/foreign-banks-with-offices-in-brazil
The Economist (2017). Under pressure, South Korean banks are going global. Retrieved February 3, 2018, from http://www.eiu.com/industry/article/985812482/under-pressure-south-korean-banks-are-going-global/2017-08-21

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