Banks Go South for New Profits
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With the economic slowdown spreading from Europe to Asia, the three major players in U.S. banking are increasing their efforts to win the Latin and South American emerging markets.
Conducting business in emerging nations present difficulties not encountered in the United States or Europe, and banking operations can be especially complex. For example, Brazil has a complicated three-tier taxation system, national corporations can only hold local currency and domestic banks face liquidity problems due to Brazilian banking regulations. But U.S. banks, as foreign entities, can partner with Brazilian local, regional and national banks and allow them to operate globally while remaining in compliance with national laws.
Citibank (NYSE: C) is pushing hard to be the region’s premier bank and have chalked up some impressive results. Latin America now represents 8% of Citibank’s total net income, and the bank ranks first in providing derivatives and risk management tools to Latin American companies. Brazil in particular has welcomed Citibank and the funding it provides for large infrastructure projects. In December 2011, Sergio Cabral, Governor of the State of Rio de Janeiro, announced that Citibank would take part in a public-private partnership to build hospitals, secondary schools, prisons and roads.
Citibank has concentrated their efforts on building their retail business. In Brazil alone, Citibank has over 7,000 employees staffing 101 Citibank branches. Over 400,000 Brazilians have Citibank accounts and over 5 million Citibank credit cards have been issued.
Rival JP Morgan Chase (NYSE: JPM) has taken a different approach to this region. The bank has concentrated their efforts on supplier financing programs and successfully developed peso-based supply chain financing in Mexico. It will soon offer a U.S. Dollar-based supply chain financing in Brazil. JP Morgan is entrenched as the leading U.S. Import-Export Bank in Brazil and is working with the Brazilian Development Bank to help support local infrastructure projects. In 2011 the bank opened trade offices in Argentina and Chile to facilitate intra-regional trade, and the results were so successful that the bank plans to open similar offices in Peru and Columbia this year.
JP Morgan offers business loans, commodity trading and cash management services to corporate clients. The value of their Brazilian mergers and acquisitions grew to $153 billion dollars in 2011.
Bank of America Merrill Lynch (NYSE: BAC) has offices in seven Latin and South American countries with a significant presence in Brazil, Chile and Argentina. Their clients are global investors and institutional investors, and this region accounted for 2% of the bank’s net revenue in 2011.
Bank of America Merrill Lynch trades and invests in financial products including high yield debt, distressed debt, distressed structured products, rescue financing, non-performing loans and other types of high risk investments. The bank is very active in municipal markets, helping municipalities to raise debt capital for public projects. Bank of America also provides commercial real estate loans and commercial real estate loan servicing.
But investing in Latin and South America carry risks inherent with emerging countries. Citibank, JP Morgan and Bank of America stand to lose their deposit base along with any and all capital assets and loan portfolio assets in the event of nationalization. Most recently, Mexico, Peru and Venezuela nationalized all foreign mining and mineral activities in their countries. A variable rate loan portfolio can become very risky and implode if rapid inflation, an ever-present risk, takes hold. Double-digit interest rates can make it impossible for borrowers to repay loans and force banks to write-off substantial amounts.
Whether by accident or design, all three banks have taken very different approaches to developing their Latin and South American markets. They provide a diverse range of banking services to governments, businesses and private citizens without directly competing with each other. As Asian and European markets continue to slow, Citibank, JP Morgan and Bank of America Merrill Lynch will continue expanding into Latin and South America in search of continued profit growth.
kprogers has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , and JPMorgan Chase & Co. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.