Bank internationalization from Latin America

The largest banks in Latin America are shown in the table below. The list shows the relevance of Brazilian and Mexican banks in the region’s financial system. In Chile, the largest banks are Santander Santiago (13rd largest in assets in the region), Banco de Chile (15th) and Banco Estado (16th). In Colombia, Bancolombia (20th), Banco de Bogota (23rd) and Davivienda (26th) were the largest. It is also noteworthy that Santander, Citigroup, BBVA and HSBC are the foreign groups show more relevant presence in the banking industry in the region.

Table - Largest Latin banks according to the AmericaEconomia ranking 2010

Source: Ranking AmericaEconomia (http://rankings.americaeconomia.com), pos june 2010

According to Unctad, only three countries in Latin America and Caribbean report outward FDI flows in finance or in financial intermediation. The Table below shows these flows for Brazil, Chile and Colombia.

Table – Outward FDI flows in finance/financial intermediation

Source: Unctad. Special thanks to Mr. Masataka Fujita for the data.

First I will focus on the Brazilian experience, which is probably the most important in Latin America because of both the intensity and the cumulative history of the internationalization process. The Brazilian financial system has been since the nineties a mix of State-owned, local and foreign banks, but local banks prevail over the foreign. Local banks and some of them are in the first steps of internationalization. Early steps date several decades back, but only as foreign branching in very low scale. Banco do Brasil inaugurated the expansion with a branch in Assuncion, Paraguay, in 1941, followed by their New York branch in 1969. The composition of foreign dependencies according to Brazilian Central Bank is shown below:

Number of foreign dependencies of the three largest non foreign Brazilian banks

Note: some related banks were not computed.

The distribution of foreign dependencies is uneven, as shown in the table below. Unlike the previous, this table covers the whole universe of banks in Brazil.

Foreign locations of dependencies of Brazilian banks, number of dependencies

Note: some related banks were not computed.

Banco Itau Unibanco has already a relevant record on internationalization matters. The bank was formed as a result of a merger of two of the largest Brazilian banks, Itau and Unibanco, which were both pursuing their own internationalization strategy. In 1979, Banco Itau established foreign branches in New York, in Cayman Islands and in Buenos Aires (Mello and Rocha, 2003). In 1994, there was founded a company in Europe, headquartered in Lisbon subsequently with subsidiaries in Luxembourg and Cayman and having acquired a relevant shareholding in Portuguese bank BPI. In 1994, the bank was awarded regulatory allowance for 32 branches in Argentina, under the name Itau Argentina, targeting at the lower and middle class which was then deemed as underserved by Argentine incumbent banks (Mello and Rocha, 2003). Having first established through a greenfield investment, Itau switched in 1998 to an acquisition and it was bought Banco Del Buen Ayre, then renamed Itau Buen Ayre. Another important step in internationalization was the financial holding company status granted by the U.S. Federal Reserve in 2002, paving the way for further penetration in the U.S. banking market. By mid-2000s, Itau tried to enter the Japanese market for remittances to Brazil, contemporarily to Bradesco’s step in a market dominated by Banco do Brasil (Gradilone, 2009). The operation in London was started in 2003 (Turolla and Lima, 2008).

In May 2006, Itau completed the acquisition of BankBoston’s operations in South American countries, thus incorporating banks with established presence in markets in the region. In september 2006 it was set up Itau Asia Securities Ltd, with a small Hong-Kong based team of 5 professionals, targeting at Asian investors for selling Brazilian securities (Turolla and Lima, 2008). In this case, Itau entered in a rather competitive market but where its knowledge on the Brazilian economy would be play out as a nontransferable asset. In parallel and before the merger with Itau, Unibanco was carring out its own internationalization strategy.

Bradesco has set up a branch in Tokyo targeting the dekasseguis. In 2004, Bradesco secured a partnership with United Financial of Japan (UFJ) to increase its share in the Japanese market, which has restrictions on the participation of foreign institutions.

State-owned Banco do Brasil, the largest bank in the country, inaugurated international expansion among Brazilian banks. After having opened several offices and branches, for restructuring most were shut down after mid eighties (Santinoni, 2009). The expansion resumed in more sustained basis after the year 2000. New operations tracked Brazilian activity abroad.

In Japan, the expansion of Banco do Brasil was linked to handling current transfers. The Bank went to Japan early in 1993 with a branch in Hamamatsu (Santinoni, 2009) and currently holds a 70% market share in transfers of “dekasseguis”, the Brazilian immigrants into Brazil (Gradilone, 2009). In August 2001, Banco do Brasil pioneered in Brazil the securitization of the flows from current transfers, by issuing a USD 300 million 5-year bond backed by the “dekasseguis” transfers; this can be considered as a debt instrument similar to “diaspora bonds” as Ketkar and Ratha (2007) report Israel has been doing since 1951 and India since 1991. Recently, Banco do Brasil established BB Money Transfer in the United States. The strategy of the new company is to use a network of retail vendors to reach the Brazilian community.

Although Brazilian OFDI is quite new, some indications are already available on whether Brazilian banks are investing abroad to provide services to their domestic clients. The SOBEET-VCC survey asked 60 respondents on their principal means of financing overseas activities. The distribution is shown in the table below.

            Source: SOBEET and VCC (2010)

The table shows that the lion’s share of financing comes from own capital, which is a very common pattern in the financing of enterprises from underdeveloped capital markets. Overseas debt and banks were important for 30% and Brazilian banks may hold a share in these segments if their foreign operations were taken as ‘overseas’ by respondents. BNDES, the Brazilian government-owned funding agency, is known to be active in financing the internationalization of selected players, the largest being JBS/Friboi. However, it is noteworthy that none of the 60 respondents to the 2010 SOBEET-VCC survey on Brazilian multinationals have even mentioned domestic commercial bank loans as their principal means of financing overseas activities. So the FTC hypothesis in the Brazilian case should be less related to banks following FDI but mostly from banks following wealthy clients, trade finance needs, security dealing and as proposed by this paper remittances.

The Chilean experience is quite recent and new. Chile explicitly favored banks to internationalize from the second half of the nineties onwards as a means of promoting a more globally integrated financial system (Saez, 2010). Banco de Chile is the most prominent bank that has a track record of internationalization, operating branches in the United States since 1982 and representative offices since the nineties in Brazil, Argentina and China. The bank has merged with Citibank Chile in 2007. Another important Chilean bank experience abroad is BancoEstado, which reached authorization for a branch in the United States in 2005 and the bank has been operating in the remittances market.

Chile is not a major recipient of current transfers. It has a stock of 633 thousands of emigrants, which although small in absolute terms represents 3.7% of the population. Emigrants’ top destinations are Argentina, the United States and Spain. Chile is also unique in its attraction of immigrants, which are about half of the stock of emigrants. Because of the profile differentials among emigrants and immigrants, outward current transfers, which amounted to USD 6 million in 2009, lie above inward transfers of 4 million. This said, the remittances market may help as a vehicle in the push for internationalization of country’s banks – but flows are quite small and it is also too early to evaluate the Chilean experience in this respect.

The Colombian experience is interesting as it shows the role of remittances and a experience with a longer track record. Colombia has 2.1 millions of emigrants in stock (4.6% of the population), compared to only 110 thousands of immigrants. Inward current transfers were USD 3.9 billion in 2010 thus showing an important market. It is noteworthy that 48.4% of the remittances come from the United States, 34.1% from Spain and 17.5% from the United Kingdom.

Earlier, in the seventies, Colombian banks established branches and subsidiaries in Panama to overcome regulatory barriers in their home county (Hall, 2005). Banco de Bogota was the first to internationalize, having established an office in Panama in 1967, which turned to a branch in 1970 (information from corporate website). In 1974 it was inaugurated a branch in New York and later on a subsidiary in the United States, Bogota Trust Company renamed First Bank of the Americas, sold in 1997. In 1980, it was created the Banco de Bogota International Corporation headquartered in Miami that was converted into a branch in 2001. More recently, Colombian banks continue to invest in Panama and Venezuela with a target at immigrants.

Bancolombia, the largest bank in Colombia in assets, has important business in the remittances market. It operates the Mi Casa con Remesas (My Home with Remittances) program in partnership with the Interamerican Development Bank, in which remittances are used to finance homes for receptors of transfers. Bancolombia secured partnership with money transfer operators for the remittances business. Bancolombia established itself in Panama in 1973, in 1987 in Cayman Islands, in 1998 in Puerto Rico, and has business in Peru. Its first U.S. branch in Miami was authorized in 2003. In 2007 it purchased the largest bank of El Salvador, Banagricola, including a remittance business with 27 offices in the United States.

In addition to the three countries with record of financial FDI, Mexico has also experiences that are worth mentioning. Remittances from the 11.9 millions of Mexican emigrants (10.7% of the population) are estimated at USD 22.6 billions in 2010, being in many years more significant than foreign direct investment inflows in the Mexican balance of payments. The destiny is the United States and Canada, this being nowadays the most important migration corridor in the world.

The Mexican financial system is also an interesting case because of the strong presence of international banks. With a high concentration of assets in few banks and large U. S. banks operating in the Mexican territory, while the bulk of current transfers also come from that the United States, one could argue that ownership advantages from the presence in Mexico would be eroded. However, there is evidence of the contrary, as presented below.

The expansion of Banco Bilbao Vizcaya Argentaria (BBVA) into the United States can be a case of indirect foreign direct investment. According to Castello and Olienyk (2008, p. 17), “the bank built its presence in Mexico in the 1990s and now is ready to exploit its ownership-specific advantages in the U.S remittance market, while having such advantage against larger U.S. banks”. The bank made other acquisitions with similar targets.

Discussion and typology

After an initial step that can be explained by static theories – namely the eclectic paradigm and the internalization theory –, banks from Latin America may have become able to acquire information and knowledge on the external market. Through this dynamic process, banks initially follow a motive for internationalization and subsequently enter in new business after having obtained relevant knowledge and information.

However, there is a relevant issue on the FTC hypothesis when applied to the remittances market. One may argue that the clients that banks seek when they go abroad for dealing with remittances are not from their original client base. They rather go to replace other providers of transactions in small amounts. However, preliminarily, I submit that the process is similar to the FTC hypothesis or a special case of the latter. Here, one could raise the issue of whether the theory of bank internationalization is well prepared to deal with those Latin American cases where remittances play a role and whether these can be actually treated as FTC.

The episodes of internationalization of Latin American banks that were identified for this paper are presented in the table below. For the purposes of organization of a typology, I have used the following legend: FTC = Follow-The-Client (traditional form); RM = remittances market; Reg = regulatory push; SNM = searching new markets.

Proposed typology of internationalization of Latin banks

The top three non-foreign Brazilian banks were represented in this paper, namely Banco do Brasil, Bradesco and Itau Unibanco. It has been reported that these banks are not also following clients or new markets, but also following their competitors in any international expansions attempted by each other. However, Itau Unibanco is the only one that so far has been pursuing new markets more aggressively, with more foreign subsidiaries both as a result of greenfield investments, and mergers and acquisitions. Bradesco as the largest private competitor may follow Itau Unibanco’s strategy but not with the same intensity.

It is interesting that Brazilian banks tap the U.S. market in a clear FTC strategy, especially following high income individuals and companies; however, they go to the Japanese market primarily for the remittances market. At this point it is unclear why this happens, but this allows us to raise a new interesting research question.

As for Chile, it is early to say, but Chilean banks are moving towards internationalization, initially through branching, and that may be related to a regulatory push in search of a more internationalized financial system.

Colombia has a more important market for remittances relative to Chile and the internationalization of Colombian banks is apparently more connected to these flows of remittances. Even the acquisition of the largest bank of El Salvador by Bancolombia may be connected to the remittances business. This is difficult to prove but another motive for that acquisition may be the search for new markets within the region, with low information and knowledge costs. If the latter, Bancolombia would qualify together with Itau Unibanco as another active market seeker.

The configuration of the financial system is relevant in the underlying dynamic process. In the case of Brazil, the financial system has a mix of State-owned, local and foreign banks, but local banks prevail over the foreign. In the case of Mexico, the financial system is highly dominated by international players but this fact did not seem to eliminate the ownership advantages of the Mexican origin. At least the BBVA experience shows that presence in Mexico was needed to growth into the United States territory for doing business among the Hispanic population. For that, BBVA possibly carried out indirect FDI operations. The fact that indirect FDI occurred in connection with the current transfers business is a possible piece of evidence on the robustness of the explanation proposed in this paper.

Conclusions

This paper investigated the internationalization of Latin banks and the formation of MNBs from that region. In addition to usual factors of the theory, I have proposed the remittances motive. As a consequence, some banking sector Developing Country MNCs may be emerging in connection with transactions of low value, namely current transfers.

Unfortunately, the proposition is difficult to test with real data and to overcome that difficulty I have presented the strategy of the largest banks of selected Latin American countries, but I am aware that the evidence from this paper warrants further investigation. Besides the data availability issue for which further analytical work would significantly benefit from datasets that could help to quantify the phenomenon, there is also the issue that the phenomenon itself is relatively young so that we might have been able to observe only its early steps and with imperfect or inadequate data.

Nonetheless, the phenomena herein presented introduce important proposals for the improvement of the usual analysis of Latin banks internationalization and possibly on the formation of new Latin players in the international banking market. In particular, Banks that engage in the business lines related to current transfers may end up investing in foreign markets and furthermore develop an asset base in those markets and the most obvious candidates are Brazilian banks in Japan and the United States, and Colombian banks in Central America and the United States.

Having found remittances as a missing piece, the analysis has also a potential contribution on the understanding of the diaspora phenomena. Diaspora brings about externalities that may contribute to the internationalization of the banking sector not because of direct transfer of knowledge by migrants’ movement or within their network as proposed by traditional analysis, but rather indirectly depending on how the financial services related to the transfers are captured by intermediaries.

References

Bair, Sheila C. Improving the Access of Recent Latin Migrants to the U.S. Banking System. In: Donald F. Terry and Steven R. Wilson (Editors). Beyond Small Changes: Making Migrant Remittances Count. Washington, D.C.: Inter-American Development Bank, 2005.

Berney, Louis. Why Are Banks Struggling In the Remittance Market? Banks for years have tried to enable consumers to send funds to other countries. Few have had much success. Cards and Payments, April 2007.

Buch, Claudia M. 2003. Information or regulation: What drives the international activities of commercial banks? Journal of Money, Credit and Banking, 35(6): 851–869.

Buckley, Peter J; Clegg, L Jeremy; Cross, Adam R; Liu, Xin; Voss, Hinrich; Zheng, Ping. The determinants of Chinese outward foreign direct investment. Journal of International Business Studies (2007) 38, 499–518.

Claessens, Stijn; Van Horen, Neeltje; Gurcanlar, Tugba; Mercado, Joaquin. Foreign Bank Presence in Developing Countries 1995-2006: Data and Trends. March 2008.

Dunning, John H. Location and the multinational enterprise: John Dunning’s thoughts on receiving the Journal of International Business Studies 2008 Decade Award. Journal of International Business Studies (2009) 40, 20–34.

ECLAC – Economic Commission on Latin America and the Caribbean of the United Nations. Foreign Investment in Latin America and the Caribbean 2006. Santiago, May 2007.

Eden, Lorraine. Letter from the Editor-in-Chief: The JIBS40/AIB50 Anniversary Issue: Innovations in international business theory. Journal of International Business Studies (2009) 40, 1407–1410

Fagen, Patricia Weiss; Bump, Micah N. Remittances Between Neighboring Countries in Latin America. In: Donald F. Terry and Steven R. Wilson (Editors). Beyond Small Changes: Making Migrant Remittances Count. Washington, D.C.: Inter-American Development Bank, 2005.

Filatotchev, Igor; Liu, Xiaohui; Buck, Trevor; Wright, Mike. The export orientation and export performance of high-technology SMEs in emerging markets: The effects of knowledge transfer by returnee entrepreneurs. Journal of International Business Studies 40, 1005-1021 (August 2009)

Focarelli, Dario, and Alberto F. Pozzolo. The Determinants of Cross-Border Bank Shareholdings: An Analysis with Bank-Level Data from OECD Countries. Temi di discussione”series number 381. Rome: Banca de Italia, 2000.

Gillespie, Kate; Riddle, Liesl; Sayre, Edward; Sturges, David. Diaspora Interest in Homeland Investment. Journal of International Business Studies 30, 623–634 (1 September 1999)

Gradilone, Claudio. O mundo chama. Revista PIB – Presença Internacional do Brasil. Year III, No. 8, Aug/Sep 2009.

Hall, Michael G. Exchange rate crisis in developing countries: the political role of the banking sector. Ashgate, 2005.

Johanson, Jan. Vahlne, Jan-Erik. The Uppsala internationalization process model revisited: From liability of foreignness to liability of outsidership. Journal of International Business Studies (2009) 40, 1411-1431.

Johanson, Jan. Vahlne, Jan-Erik. The internationalization process of the firm: a model of knowledge development and increasing market commitment. Journal of International Business Studies, v. 8, p. 23-32, 1977.

Ketkar, Suhas L. Ratha, Dilip. Development Finance via Diaspora Bonds: Track Record and Potential. World Bank Policy Research Working Paper 4311, The World Bank, August 2007.

Luo, Yadong; Tung, Rosalie L. International expansion of emerging market enterprises: A springboard perspective. Journal of International Business Studies (2007) 38, 481–498

Madhavan, Ravi; Iriyama, Akie. Understanding global flows of venture capital: Human networks as the “carrier wave” of globalization. Journal of International Business Studies 40, 1241-1259 (October/November 2009)

Mello, Renato Cotta De; Rocha, Angela Da. Internacionalização de um Banco Brasileiro no Mercosul: Itau Buen Ayre. In: Angela da Rocha (org) As Novas Fronteiras: A Multinacionalização das Empresas Brasileiras. Rio de Janeiro: Ed. Mauad / COPPEAD, 2003.

Miller, Stewart R.; Parkhe, Arvind. Is There a Liability of Foreignness in Global Banking? An Empirical Test of Banks' X-Efficiency. Strategic Management Journal, Vol. 23, No. 1 (Jan., 2002), pp. 55-75

Moneygram International, Inc. Form 10-K – United States Securities and Exchange Commission. Commission File Number: 1-31950, 2010.

Monge-Gonzalez, Ricardo; Céspedes-Torres, Oswald; Vargas-Aguilar, Juan Carlos. South-south remittances: importance of the Costa Rica-Nicaragua corridor. San José: Academia de Centroamérica, 2009.

Oettl, Alexander; Agrawal, Ajay. International labor mobility and knowledge flow externalities. Journal of International Business Studies 39, 1242-1260 (December 2008).

Qian, Lihong; Delios, Andrew. Internalization and experience: Japanese banks’ international expansion, 1980–1998. Journal of International Business Studies, Vol. 39, No. 2 (Mar., 2008), pp. 231-248.

Sabi, Manijeh. An Application of the Theory of Foreign Direct Investment to Multinational Banking in LDCS. Journal of International Business Studies, Vol. 19, No. 3 (Autumn, 1988), pp. 433-447

Saez, Raul E. Trade in Financial Services: the Case of Chile. In: Mona Haddad and Constantinos Stephanou (editors). Financial Services and Preferential Trade Agreements. Washington, DC, The World Bank, 2010.

Santinoni, Andrea Santana. O comportamento estratégico do processo de internacionalização de um banco estatal: o caso do Banco do Brasil. UnB-Universidade de Brasilia, Masters Thesis. Brasilia, April 2010.

SOBEET; VCC. Brazilian multinationals positive after the global crisis. Sao Paulo and New York: SOBEET (Sociedade Brasileira de Estudos de Empresas Transnacionais e da Globalização Economica) and VCC (Vale Columbia Center on Sustainable International Investment), December 7, 2010.

Suro, Roberto. A Survey of Remittance Senders and Receivers. In: Donald F. Terry and Steven R. Wilson (Editors). Beyond Small Changes: Making Migrant Remittances Count. Washington, D.C.: Inter-American Development Bank, 2005.

Terry, Donald F. Remittances as a Development Tool. In: Donald F. Terry and Steven R. Wilson (Editors). Beyond Small Changes: Making Migrant Remittances Count. Washington, D.C.: Inter-American Development Bank, 2005.

Turolla, Frederico A.; Lima, Maria Fernanda Freire. Itau Securities: a internacionalização é um negocio de pessoas. Central de Cases ESPM, Case study. 2008.

Williams, Barry. Positive theories of multinational banking: eclectic theory versus internalization theory. – Journal of Economic Surveys, 11, 1, pp. 71–100, 1997