Are international banks different? Evidence on bank performance and strategy

Focus

This paper examines how bank internationalisation might influence bank performance. Using bank-level information for 113 countries over the 2000-15 period, we consider how bank internationalisation is related to bank valuation, risk and return. As international banks from developing countries have recently expanded strongly, we also focus on whether these banks perform differently to international banks based in high-income countries. Finally, we study how internationalising banks may differ in terms of their business models and funding strategies, as well as how far their lending volume varies with the business cycle in their home country and in any foreign country where they have a subsidiary.

Contribution

Our paper adds to the literature investigating the impact of bank internationalisation by analysing data at the consolidated bank level during the 2000-15 period, which includes the crisis period and its aftermath. In examining the implications of bank internationalisation, we distinguish between banks headquartered in developing countries and high-income countries.

Findings

We find that bank internationalisation has generally been associated with lower bank valuation as measured by Tobin's Q and the market-to-book value of equity. In part, this reflects a lower return on equity. But internationalising banks from developing countries did better, were valued more highly, were less risky and enjoyed higher returns when active in a greater number of countries. Following the financial crisis, international banks performed better than domestic banks, as reflected in higher market valuations, a lower non-performing loans ratio and a higher return on assets. For international banks headquartered in developing countries, our results indicate that bank internationalisation reduces the cyclicality of their domestic credit growth with respect to home country GDP growth, smoothing local downturns. In contrast, if the international bank is from a high-income country and invests in a developing country, its lending tends to vary more strongly with the business cycle, which can be destabilising.

Abstract

This paper provides evidence on how bank performance and strategies vary with the degree of bank internationalization, using data for 113 countries over 2000-15. Over this period, bank internationalization is associated with lower valuations and lower returns on equity. However, developing country banks that internationalized seem to have fared better than their high-income counterparts. Following the crisis, international banks were revalued particularly if they had stable funding in the form of deposits and if they had more generous deposit insurance coverage. Furthermore, for international banks headquartered in developing countries, our results indicate that bank internationalization reduces the cyclicality of their domestic credit growth with respect to home country gross domestic product growth, smoothing local downturns. In contrast, if the international bank is from a high-income country investing in a developing country, its lending is relatively procyclical, which can be destabilizing.

JEL classification: F36, G21, G28

Keywords: bank internationalization, financial crisis, deposit funding, procyclicality