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Spanish Banks Eye China-LatAm Business

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Spanish banks are leveraging Latin America's growing ties with China.


LBC SPECIAL

Knowledge@Wharton  

Just as they did during the 1990s, the biggest Spanish banks have embraced globalization in an effort to become less dependent on their home markets. Latin America has always played a significant role in the banks’ globalization initiatives; their strength there is now helping them enter China. BBVA and Banco Santander in particular have focused on the Asian giant, which offers tremendous growth potential.

Santander has made the latest move in that direction. On March 28, Santander announced a strategic alliance with China Construction Bank (CCB), China’s second-largest financial institution. The banks have agreed to create a joint venture with a goal of opening 100 branches in rural areas over the next three years. The deal is subject to regulatory approval.

The deal involves an initial joint investment of 380 million yuan (40 million euros). That could grow to 652 million euros in the second year.
Santander will own 19.9 percent of the joint venture, while CCB will own 80.1 percent. Foreign banks cannot legally own more than 20 percent of any Chinese financial institution.

BBVA, headquartered in Bilbao in northern Spain, was the first Spanish institution to commit to China, and is now the largest Spanish investor there. Led by Francisco González, BBVA is a 15% owner of China CITIC Bank. Together, the banks have made investments worth more than 2 billion euros in China since 2006, creating joint ventures offering auto financing and private banking. BBVA now has subsidiaries in Hong Kong, Singapore and Tokyo and representative offices in Beijing, Shanghai, Taipei, Mumbai, Sydney and Seoul.

La Caixa is the other Spanish institution with a presence in China. Its holding company, Criteria, owns 15.2 percent of Hong Kong-based Bank of East Asia.

AN EXPORTABLE MODEL

Of the three institutions, BBVA has the “most advanced positioning in China,” according to Mauro Guillén, a professor of international management at Wharton and director of the Lauder Institute. “In addition to its ownership in CITIC, it has a team that is studying the Chinese market. That’s the way things have to be done because China is a hard, complicated market. Santander has taken some small and very tentative steps, and La Caixa has a very limited presence, which is not bad.” The objective behind the Spanish institutions’ initial moves must be to “take small steps in the market in order to become familiar with it, and explore the terrain,” Guillén adds.

The banks have different strategies in China, although they seem to be similar at first glance, notes José Ignacio Galán Zazo, director of the corporate social responsibility think tank and the Latin American corporate management department at the University of Salamanca in Spain. “Banco Santander has followed a strategy of cooperation through alliances, while La Caixa has the opposite model of participating in a holding company. Meanwhile, BBVA has pursued a model that combines both kinds of structures.” Each approach has different goals, methods and results, he says.

According to Galán, Santander and La Caixa are employing the wisest approaches because “their strategies are totally in line with their initial business idea. BBVA’s strategy is a hybrid that combines both positions, which, in my view, involves additional costs in terms of additional capital for the structure of the business.”

Galán considers Santander’s strategy “slightly more successful” than BBVA’s because it involves “less risk, has a greater chance to acquire the intangible assets involved in Chinese commercial relations with Latin America, and is an agreement that is more specific to the Chinese context, involving lower risk of the appropriation of Spanish know-how. And it is more competitive over the medium and long-term in local Chinese markets.”

In any case, Manuel Romera, director of financial studies at the IE Business School, says both Spanish institutions have “a very well-defined business model that can gain a foothold in the Asian giant. This is about a retail banking model that can be exported to China, where the great majority of the population still has no contact with financial institutions.”

Esteban García Canal, professor of corporate organization at the University of Oviedo, notes that “Spanish banks have expanded globally by pursuing markets where they can take advantage of the experience they accumulated in their own domestic market.” That experience is important, he adds, “if we take into account that the financial system in Spain has undergone enormous development in just a few decades, and that the industrial growth processes have provided our banks with experience in putting together mergers and acquisitions.”

This cumulative experience “takes on special importance when we consider that the countries the Spanish banks are expanding into are not only large, but have barely developed financial systems and high rates of economic growth,” García Canal says. In this context, “the cumulative experience of the Spanish banking sector provides it with enormous business opportunities for entering other countries where it can quickly exploit opportunities associated with the development of those countries’ financial systems.” He adds that China “not only more than meets those requirements, but it is also a place where any bank that aspires to have a global presence must be located. All in all, to the extent that its regulations require, China is a market where it makes sense to enter with help from a local partner because of the unique characteristics and risks of its market.”

A BRIDGE TOWARD LATIN AMERICA

The big Spanish banks have a strong presence in Latin America, where they have developed powerful commercial divisions. On one hand, this presence opens up doors in Chinese institutions that are interested in the South American market amid growing trade between China and South America. On the other, Spanish banks will be able to finance much of that flourishing trade.

“Without the Chinese market, we cannot be one of the 10 main banks in the world,” Juan Rodríguez Inciarte, Santander’s chief executive, said in a recent interview with China Daily. He insisted that his institution is strongly committed to the Chinese market, noting that the rapid growth of trade and investment ties between China and Latin America will create business opportunities for Banco Santander.

In January, BBVA became the first Spanish bank to sign an agreement with China Development Bank (CDB), establishing a framework for cooperation in Latin America. CDB also partners with BBVA’s partner CITIC in private banking, pension and advisory services largely “for those companies that hope to take advantage of the flows of business between China and Latin America,” Inciarte told China Daily.

Galán recalls that trade and investment ties between Ibero-America and
China have enjoyed enormous growth over the last two years, and he expects continued expansion in coming years, “leading to a structural change in international commercial relationships between Latin America and China. We expect that before 2015, China will take the place of the European Union as Latin America’s leading trading partner.” As a result, he argues, “positioning oneself in China means going in and walking on the terrain that will be the engine of the 21st century, and that involves both risks and opportunities.”

Guillén compares the strategy these banks are pursuing to the approach that Telefónica is using in the Chinese market. Spain’s Telefónica, one of the main players in Latin American telecommunications, has a strategic alliance with China Unicom. Guillén argues that “Spanish companies can play the card of helping the globalization of Chinese companies; at the same time, they take advantage of that by entering the Chinese market.”

The relationship between Spanish and Chinese institutions requires that the banks become involved in alliances,
García Canal says, “and in this context, those Chinese banks that are capable of participating in an alliance require something in exchange for opening the door to the Chinese market for their foreign partners. The currency of exchange in the case of Spanish banks comes from being able to realize cooperative projects in Latin America, a region where Chinese banks are beginning to get interested." He notes that Chinese banks are interested in expanding internationally, but due to factors including the institutions' limited technical backgrounds and the commercial relationships that currently exist in China, prefer to engage in projects in Latin America before doing so in Europe.

“These sorts of alliances, which are complementary from a geographical viewpoint, are not a novelty,” García Canal adds. “They have existed in other industries such as energy, telecommunications, airlines, the automotive sector and so forth. These alliances are a way for companies to acquire a global presence without assuming great risks. Once the uncertainty surrounding the project disappears, the alliances turn to acquisitions, or they are abandoned, as we can see from the well-known experiences in most of those above-mentioned industries.”

SPAIN”S FUTURE IN CHINA

“Short-term,” emphasizes Romera of the IE Business School, “it is very hard to evaluate what the benefits are going to be for Spanish institutions that acquire these positions in China.” In the long term, he expects “a country like China, which has a great capacity for economic growth, can enable Spanish banks to make a lot of money.”

“The next move that Spanish institutions must undertake in China is to expand their network of offices there, since they are currently not well-developed,” Romera says. At the same time, it is important “for foreign banks to be able to unite and form a lobby that pressures political authorities in China to expand the freedom of action for non-Chinese financial institutions, and permits greater competition in the system.”

Guillén agrees, noting that “this is a banking market that still has to change a great deal in coming years.” He does not dismiss the possibility, for example, that foreign institutions such as Spanish banks can have their own businesses in China within a period of 15 or 20 years without having to rely on a local company. “There needs to be a major transaction that changes the situation. We might be talking about a great exchange of shares or an important purchase of assets,” he notes. The latter will be the road for foreign banks to pursue in China, he adds, because “you cannot buy an entire institution, and it is better to go ahead and acquire businesses from someone who wants to sell them.”

Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania

 

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