Domestic Institution’s Response to Foreign Entry

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Taken together, these developments at least suggest banks financial stability could have been jeopardized. Since retail loans expanded faster than other loan types during a time when overall bank credit growth exceeded the pace of GDP growth certainly warrants analysis. On top of that, the combination of declining loan interest rates and margins has the potential combined effect of placing more individuals into a position to take on debt and conceivably providing banks an incentive to expand lending. Given that household consumption grew faster than in the United States at a time when consumption was dangerously high in that country understanding whether banks made large portions of rapidly rising retail loans to uncreditworthy individuals is the issue we turn to in section 6.3.4 below. Next we demonstrate domestic banks were also part of retail‘s rise.

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developments at selected domestic banks to determine whether retail loans increased in total share. Then, we focus on operating efficiency to understand whether domestic banks made improvements in the face of fierce competition from foreign owned subsidiaries of global banks.

First, we analyze the percent of total loan portfolio allocated to the retail segment at selected domestic banks. Banks selected were chosen because they are comparatively large banks operating in countries where the aforementioned global banks also operate. This enables us to make important observations about the degree to which global banks‘ retail strategies transferred to large local institutions. Table 6-3.1 shows percentages for select domestic banks from the earliest years available.

Table 6-3.1 Retail Loans as Percentage of Total Loans for Selected Domestic Banks at Year-End Brazil

Bank 2000 2007 2011

Banco Do Brasil 20.20% 21.40% 30.90%

Bank 2001 2007 2011

Bradesco 27.20% 42.82% 39.80%

Mexico Bank 2000 2007 2011

Banorte 8.31% 33.63% 30.39%

Poland Bank 2004 2007 2011

PKO Bank Polski 23.18% 23.97% 16.15%

Turkey

Bank 2002 2007 2010

TC Ziraat

Bankasi 11.68% 46.32% 40.85%

Bank 2001 2007 2011

Turkiye Is

Bankasi 19.87% 34.70% 27.80%

Three crucial points become apparent from this data. First, early in the decade, domestic banks had lower retail loan shares than most global banks had around the same time. Each global bank had devoted over thirty percent of their portfolios to retail in 2002, and over 40 percent by 2004. None of the domestic banks listed in 6-3.1 was over thirty percent in the early 2000s. Brazil‘s Bradesco was the highest at just over 27 percent, but that was still far behind banks like Santander and Citibank. Second, almost all of the domestic banks pushed retail lending after the early 2000s, eventually accounting for noteworthy shares. In fact, retail loans comprised an additional 10 percent of the loan

Source: Annual Reports and Financial Statements

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portfolio in the last year available than the first year for all but two banks: Turkey‘s Turkiye Is Bankasi and Poland‘s PKO Bank Polski. In the case of PKO Bank Polski though, data was not available prior to 2004, so it may be possible retail loans experienced similar growth when taken from the very beginning of the 2000s. Turkiye IS Bankasi‘s drop may be due to impact from the financial crisis since 2007 figures showed nearly 35 percent of the portfolio devoted to retail. On the other hand, some banks such as Mexico‘s Banorte and Turkey‘s TC Ziraat BAnkasi were able to push retail‘s loan share upwards of twenty percent of the total loan portfolio. Third, the financial crisis impacted a number of domestic banks. After 2007, retail fell, or stagnated, for each domestic bank, with the exception of Brazil‘s state-owned Banco do Brasil.

Domestic banks, thus, exhibited similar patterns to global banks during the 2000s.

While their retail segments may not have reached the same heights as some global banks, they unquestionably increased their focus on retail banking. The majority of that change in focus occurred prior to the global financial crisis. Nonetheless, that global banks allocated higher percentages of lending to retail – keeping them fairly high for most of the decade – the fact that domestic banks increased retail strongly implies domestic banks were mimicking global bank‘s retail strategies.

Additionally, domestic banks would have had to compete directly with increasingly efficient foreign owned subsidiaries. Table 6-3.2 below outlines cost-to-income developments for select domestic banks over the decade. These statistics show most domestic banks were productive in achieving better cost-to-income ratios. Some of the most notable improvements were by state-owned banks. Poland‘s PKO Bank Polski lowered its ratio by an astonishing 54 percent in 11 years. Brazil and Turkey‘s state-owned banks achieved less dramatic improvements, but significant nonetheless at around 10 each.

Privately-owned domestic banks accomplished notable progress as well. Mexico‘s Banorte saw more than a 20 percent improvement, while Brazil‘s Bradesco lowered its ratio by 12 percent. Turkey‘s Turkiye Is Bankasi bank was the only major domestically owned institution observed here to not improve its cost-to-income ratio. Perhaps that is explained by the fact that in 2000, its ratio was already quite low. In fact, at 50.75 percent in 2000, it

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had better overall cost-to-income than even the global banks. Furthermore, it improved to 46 percent by the end of 2008. So, Turkiye Is Bankasi‘s apparent deterioration might better be explained by stress from the financial crisis.

Table 6-3.2 Selected Domestic Banks Cost-to-Income Ratios (%) at Year-End

Country Type Bank Dec-01 Dec-07 Dec-11

Brazil SOB Banco do Brasil 69.23% 60.6%* 58.47%

DPB Bradesco 59.90% 43.40% 47.41%

Country Type Bank Dec-01 Dec-08 Dec-11

Mexico DPB Banorte 76.72% 65.60% 55.72%

Country Type Bank Dec-01 Dec-08 Dec-11

Poland SOB PKO Bank Polski 93.84% 49.85% 39.59%

Country Type Bank Dec-00 Dec-08 Dec-11

Turkey SOB Ziraat Bankasi 59.34% 36.00% 49.55%

DPB Turkiye Is

Bankasi 50.75% 46.11% 59.08%

*Dec-2006