How the universal banking model will be reborn


Rob Dwyer
Published on:

Have HSBC and Citi found a way to cut costs and maintain revenues in Latin America? If so, local banks will not accept that quietly.

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One of the curiosities thrown up by the awards research process in Latin America was that HBSC is winning new corporate banking relationships with multilatinas based in markets such as Colombia and Peru. 

HSBC’s global leadership say that, despite the fact it no longer has full banking licences in these markets, they are actually improving revenues in traditional corporate relationship banking areas, such as cash management, trade finance and FX flows. HSBC naturally ascribes this to its own prowess. But I wonder.

I believe that such retention – and extension – of this business is actually a more accurate reflection of the fact that no local bank has filled the universal banking void created by the retreat of HSBC and Citi in recent years. These corporate banking services usually go to the main lending banks. The quid pro quo for the banks that provide these companies with (implicit or explicit) balance-sheet support is that the profitable cash-management and flow business goes to them. 

But if these local relationship banks are constrained geographically from providing Latin American companies with the support they need (and there is a large and growing need to support these companies in Asia), then HSBC can win the business without committing to the wider relationship.

The good news for HSBC is that none of the leading local banks seem to be interested in developing a truly pan-regional presence – not to mention a global one. 

Bradesco BBI hopes to become the exception: it recently exclusively told Euromoney that it hopes to become a regional corporate and investment bank. BBI’s cautious experiment with expanding its trading desk to ex-Brazilian Latin American fixed income products is a start. According to the head of BBI, Leandro Miranda, broadening its trading strategy increased its share of Brazilian trades and confirmed to him that being pan-regional would tap into counterparties’ demand for a genuinely regional platform.

“I see Bradesco going Latin American very, very fast,” Miranda said, saying research, fixed income and equity trading were quickly going pan-regional. “And then last, but not least, we will need to approve credit lines as we push to be a truly Latin American bank.”

If Bradesco BBI really does commit balance sheet as well as building its corporate banking platform in Latin America, it will do so alone. 

Bradesco’s domestic competition is going the other way. Itaú BBA has sold its operations in Mexico and, although BTG Pactual remains a serious player in Chile, Colombia and Mexico, it certainly seems to be reining in its regional ambitions. Other large regional banks are dabbling in other markets – most notably the Colombian banks expanding in central America – but this is more of a retail-led strategy to provide scale that is not offered by their own domestic markets. These are not core corporate and investment banking markets.

The open question for Bradesco – and for BBVA and Santander, which also have pan-regional operations – is the extent to which their lack of presence in Asia will hurt their ability to leverage local Latin American relationships into these money-making transactional services. Santander, in particular, has upped its game in the region: its network in Europe will be attractive to many companies. But what can it do on that South-South trade route that is so critical for many multilatinas? 

Realistically, most of these companies will need access to Asian desks and, more importantly, to the physical delivery of banking services in Asia. And neither Latin America’s best corporate and investment banks nor the Spanish banks are likely to invest in an Asian expansion drive. Regulation today just punishes such ambition, while competition in Asian banking means that the capital invested is unlikely to be sufficiently well rewarded. 

All of which means HSBC and Citi are enjoying an asymmetric withdrawal from the region in terms of costs and revenues. Have HSBC and Citi found a balance-sheet-risk-free way to cut costs and maintain revenues? It certainly looks that way for now. But the local banks will not accept this new reality quietly. 

The first step will be for the Latin American banks to step up their demands that local balance-sheet support translate into transactional service relationships locally (whatever the bank can meaningfully define as locally). Even if this means pluralization of the provision of these banking services in different markets throughout the world, the locals will increasingly apply pressure to re-assert the traditional quid pro quo.

The local banks will also explore relationships with banks in Asia (and other markets, but Asia will be the priority) to replicate a unified provision of such services from a single bank. 

Technology will be an enabler of such strategies. And while the Asian banks do not have such an urgent imperative to secure such agreements, there is still compelling logic for them to do so – Asian companies are coming to Latin America, too.

Ultimately, the future competition for HSBC’s treasury and transactional services relationships with Latin American companies will be its own old model: universal banks that provide access to global markets and balance-sheet support in these companies’ home markets. These universal service providers won’t be single banks anymore.