Against a backdrop of dire fortunes in most developed western markets, consumer finance arms of the major banks have been looking for growth in emerging markets, with Asia, Eastern Europe and Latin America seen as key areas for growth. Jonathan Bracey-Gibbon reports.
Increasing credit card and personal finance uptake illustrates the trend of continued economic expansion of many emerging markets. Between 2004 and 2007, credit cards penetration in Brazil and Mexico more than doubled; Poland and India saw credit card numbers treble, with the value of actual debt also trebling in the latter. According to McKinsey there are now around 20m credit cards in circulation in India. The figure could reach nine times that, as the middle class expands to over 300m by 2025.
The flip-side to this growth is still fresh in the memory: a credit card boom in South Korea in 2003 caused a massive rise in household debt.
Multinationals of all descriptions are trying to keep up with the pace set by emerging market growth in building their brands, and the expertise to manage them. Succeeding in emerging markets is essential to defend - and increase - their market share. Ultimately, their fate in emerging markets will be a key indicator of how they’ll fare everywhere else.
"With overall improvements in Latin America, inflation has come down," said Douglas Smith, regional head of research for the Americas at Standard Chartered Bank. "People are working, there haven't been many financial crises and people have been putting money into banks," though it is still early days.
"In the case of Brazil rates are still high at around 40%, but there has been a problem throughout the region with developed consumer credit rating,” said Smith. “Rates are high [to consumers], more so than commercial rates to businesses. There is domestic demand for credit and consumer finance is growing rapidly, but it did start at zero and not so long ago."
Financing growth
HSBC’s emerging markets balance sheets are almost all liquid and funded primarily by customer deposits, it said. GE Capital, on the other hand, uses a range of options reflecting its range of its operations.
"We do like emerging markets, the fundamentals are good and the future offers premium growth rates and returns," said a GE Finance spokesperson. "There's a healthy growing middle class, there's lower consumer debt and less competition with better returns."
Funding is divided into four buckets: local deposits, local debt issuance, local bank funding and cross-border funding. “We don't access the securitisation markets. That's only really done in the US with credit card and sales finance portfolios,” the spokesperson said. The route taken depends on variables like the local structure and the regulatory environment. Where possible, it matches its assets and liabilities on a currency, rate and duration basis.
For example, in Turkey it has had a JV with Garanti Bank for three years, which is virtually self-funded by its deposits. In Brazil, on the other hand, GE has a wholly-owned finance company. "In Brazil, where the finance company cannot take deposits, and where there is not a deep enough local capital market where we can be a local issuer, we leverage our global banking relationships to provide funding for the asset growth,” said the spokesperson.
In Mexico, where the capital markets are perceived to be developing nicely, it initiated a commercial paper programme to augment its cross border funding. “We have a finance company there, but up until last year we raised dollars [in capital markets] swapped into pesos and funded that way.” Last year it launched a local paper programme, and it plans to issue term debt in Mexico to build up a curve there.
“We'll typically go to where the demand is and then use derivatives where necessary to affect our match funding to the asset side," the GE spokesperson explained.
Further afield, less developed emerging markets show potential, but are in need of regulatory assistance and the implementation of strong structures as much as investment. The World Bank's International Finance Corporation is primarily concerned with the development of consumer finance strategy to develop access to housing.
"There's always a fine balance between how much development of industry is needed to enable access [to consumer finance] and how much to avoid any risk of financial crisis," said Ary Naim, senior financial specialist at the IFC's Financial Markets Department.
The IFC also seeks to develop legal frameworks around which a mortgage market can flourish. In consumer finance, the structure for growth is more important than the profit, but the funding techniques are the same. "IFC provides direct financing to local banks, stakes in equity developed credit lines, supporting bond issues with credit enhancement capabilities, helping in the securing of securitisation," said Naim. "In turn IFC raises finance from the international capital markets where its AAA rating gives it prime standing alongside major commercial banks."