Of International Banking Operations

A bit of a tangent today, in a sense I am proud of my employer decisions.  About 10 years ago, my employer decided to shut down the vast majority of its foreign operations (Before my time), keeping a small (funding) operation in London, and two regional offices in other major European cities.  These limited European operations generate a small profit for the firm; they have limited aspirations and do an excellent job.

Our firm is a smaller financial institution, and having international operations to “follow our clients” just didn’t make any sense.  My own experience working in London, New York and Singapore for very large financial institutions would also justify similar decision.  Our “home” clients were just not interested in working with us (and when I say us, I mean three different institutions from three different continents…).  Bottom line, our “home” client wanted local market expertise, and not some overpaid expatriate douche bag which had gotten off the boat two weeks earlier! (I wish I was making this up, but this actually happened – a German colleague (almost no English) investment banker debarked in Singapore and started pitching German clients his local expertise – he got lost driving back his “clients” to the airport…needless to say that this client took his business elsewhere!)

This morning, the royal Bank of Canada unveiled its results for the first quarter, the numbers were good, but all the profits were generated by the domestic operations.  The foreign operations were once again a drag on profits.  RBC is Canada’s premier financial institution, with a market cap of nearly $90 billion it stands shoulder to shoulder with some of the world’s largest banks (JPM and BoA are both around $154 billion in market cap).  RBC has been active in Europe and South America for more than a century.  It is a well established player in these markets.  Despite this RBC’s foreign operations almost never make a profit, and generally produce losses (as they have in the first quarter of 2010 – with a $27 million loss, which is better than the $1.1 billion loss for 2009, still…).

My point is that if one of the best run international banks is unable to generate consistent profits from its international operations, what chance do medium sized banks have, and why do so many try? My guess is habit, looking at the annual report of their competitors; banks decided that they too needed a foreign presence.  My guess is that those strategies are never fully though-out 

My employer decided that instead to strike agreements with strong local financial institutions.  Has it paid off?  Hard to say, our clients appear happy, they get our “seal of approval” and introduction to the right people, do we get the same kind of referral, no we don’t, but then there’s not that much interest in investing in Canada – on the other hand we have virtually not costs associated with the endeavor.