Limited business opportunities in the home market
Recent years have witnessed increased merger and acquisition activity in banking, with most notable of all the Dubai Bank merger and the establishment of Emirates Development Bank. At the same time, deregulation and advanced technology have enabled banks to increase the scale and scope of their business.
In 2009, few of the largest U.A.E. national banks have expanded their foreign activities.
- Union National Bank inaugurated representative office at the Shanghai World Financial Center
- EmiratesNBD opens branch in London
- Emirates NBD launches Emirates Investment Services in Riyadh
The internationalization, regardless the degrees, is related to different home-country factors. The size of the country and the concentration of the banking system appear to be the most significant variables. In addition, trade or economic integration is an important driver of internationalization. Economic integration does not only stimulate cross-border banking within the region, but also global banking beyond the region.
The geographic location, regulation and profit opportunities in the host-country are pivotal elements of research into determinants of the destination of foreign investment. Technological progress has lowered the information costs. Nevertheless, existing research finds that distance between home and host country continues to be negative determinant of investment. AÂ Â geographic focus in cross-border usually has a positive effect on value of the deal. Characteristics of the host-country such as language and culture could pose efficiency barriers and hinder mergers.
A client pull hypothesis states that the bank’s international clientele provides an incentive for internationalization by the bank. The financial system of the foreign country might lack a level of sophistication that the bank’s clientele desires. The size of a bank is related to the strength of this effect, since larger banks are more likely to harbor internationally diversified customers. Other static finds that foreign-owned banks lend more to borrowers that are not from the home-country. The degree of integration between countries has a positive effect on the probability that a bank will conduct business in these countries. This emphasizes the client-pull effect.
The size of the country is a proxy for the inherent business opportunities of a country’s economy. Available business opportunities in the home market should thus lower the incentive for banks to expand abroad. The development of the country is a proxy for the sophistication and efficiency of the financial system. Banks on these markets must innovate and operate efficiently to survive. Their efficiency and innovativeness enables them to compete more successfully on an international platform. Size, measured as GDP and population, represents the domestic opportunity for banking services. To measurement for development is the GDP per capita.
Financial Sector
Having covered the size and development of the country, an indicator more closely related to the internationalization of a bank is the domestic financial sector. Its characteristics may determine the motivation of banks to look for business abroad, or may even push banks abroad. Three characteristics can define the financial sector: the relative size, bank- or market-based, and concentration of the banking system. The relative size of the financial sector reveals something about the depth of the financial markets and the ability of financial service providers to exploit market opportunities. The depth of the banking system should provide banks with a steady income at home, enabling them to finance foreign ventures. The efficiency of the banking system also provides the banks with a competitive edge globally.
As the wholesale and investment-banking market are more competitive, business opportunities at home can only be exploited by offering innovative products, securitization for example. Innovative banks who successfully operate in these conditions should thus be an equal match for international competition. But, as the investment-banking is dominated by global investment banks, the argument does not fully apply to the commercial banks. Most retail banks do have investment banking operations, though fee income is not the main driver of income for these commercial banks.
The business of banks can be broken down into three categories. Business in the home country of the bank, business in the region and business in the rest of the world. Respectively depicted as Home, Regional and World.
In Europe, the Single Market Programme Act created an environment in the early 1990s allowing banks in any member country of the European Union (EU) to open branches anywhere else in the EU. The introduction of the euro in 1999 further strengthened the linkages between financial markets. The Asian-Pacific region, however, follows without significant regional economic ties.
Large European banks are more international than their U.S. counterparts, even when not counting intra-EU business. Recent research compares the 60 largest of the world and finds that European banks have 50% of their business outside their home country, half of which is outside the EU.
Banks in the Americas and in the Asian-Pacific region, on the other hand, have less than a quarter of their business abroad. One reason for the lower international business share of U.S. banks might be the large home market, which reduces the appetite to look for opportunities abroad.
