Financial Spillovers and Emerging Markets

This assignment focuses on the effects of international financial spillovers on emerging market economies. It requires students to critically evaluate the role of economic fundamentals in shaping these spillovers and analyze the policy responses implemented by emerging markets to mitigate potential risks.

Running Head: International & Global Businesses
Westpac Group
International & Global Businesses
Group International Expansion Report

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Table of Content
Brief Background................................................................................................................................2
Global Expansion................................................................................................................................3
Points to take into consideration by Westpac on how to go global..........................................4
Banking Sector in Brazil.....................................................................................................................6
Current Features of the Banking system in Brazil......................................................................7
PEST analysis.................................................................................................................................8
Banking Sector in Finance...............................................................................................................10
PEST analysis of France.............................................................................................................11
Banking Sector of Korea..................................................................................................................12
Salient feature of the South Korean Banking Sector...............................................................13
PEST Analysis of South Korea...................................................................................................13
Recommendation..............................................................................................................................14
Conclusion.........................................................................................................................................15
References........................................................................................................................................16

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Brief Background
Westpac Banking Corporation, Commonwealth Bank of Australia, National Australia
Bank and Australia and New Zealand Banking group are the four largest and the
biggest retail banks in Australia having the AA rating and serving the population
since decades. The banking system in Australia is undergoing progressive
deregulation and privatization, with a large number of foreign banks getting the
permission to enter into the financial market the competition is getting intense among
the existing and the new players. It is the Reserve Bank of Australia which sets
monetary policy and regulates the payment system (Vincent, 2016)
Westpac Banking Corporation is the oldest bank of Australia which has been serving
the people since last 200 years. The bank is one of the most trusted banks amongst
the population owing to its wide range of financial service offering, and its vision to
become one of the world’s great service companies, helping the customers,
communities and people to prosper and grow. Westpac is Australia’s second largest
company employing over 40,000 people across the world and serving more than 13
million customers worldwide(Cranston,2017) Westpac has its headquarters located
at Sydney and is flourishing under the leadership of Brian Hartzer (MD & CEO).
Westpac earned revenue of 21.64 Billion AUD in the year 2015 and its financial
result of FY 16-17 are promising as well (Pomering, 2017)
Over the period Westpac realized that globalization in banking is extremely important
for the business as well as for the benefits of people in different nations. With this
aim in mind Westpac is looking to explore banking opportunities in the markets of
France, Korea & Brazil. The purpose of the report is to assess the banking

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opportunities in these countries, understand the macro environment of the countries,
the banking habits of the population, cultural difference in these countries and finally
make a recommendation based on all the above factors for Westpac to make an
entry.
Global Expansion
It can be understood as planned expansion of company’s business activities into
different countries around the world, it is often confused with making investment in
foreign countries but in actuality it is more than that; the concept lies in maintaining
an actual business presence in other countries, serve the nation and its population
and raise the envelope of product and services offered in those countries. Entry of
banks in foreign countries depends on the bilateral treaties existing between the
countries, but majorly there are 2 forms of entry on a foreign market (Williamson,
2014).
 Greenfield investment-This involves setting up an institution from the scratch,
the investment is not limited only to human resources but also applied to
capital infusion in the bank(Jensen, Cobbs & Groza,2014)
 Acquisition of a control position from a local institution, this control can range
to any percentage.
Entering the market via Greenfield investment helps bank to take advantage of
international reputation, these are beneficial for less stable economies or
underdeveloped economies as people are looking for secure placements. By
acquiring a control position in local institution helps the bank to get access to the
existing banking clients and also gets a better access to the market knowledge.
Westpac being a foreign bank and having a reputation of being extremely successful
is better positioned to offer products and services requiring a global platform, a
considerable amount of capital with a strong technological content, as well as the
experience and the skills needed to provide sophisticated products to the consumers
(Rugman & Verbeke, 2017)

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The four key strategic decisions at the hand of Westpac group are:
 Country Choice- Have to pick from Korea, Brazil and France
 Entry Mode- M&A, Strategic partnership, setting up a new institution
 Timing & Sequencing
 Exploiting existing product and services or create new ones.
Points to take into consideration by Westpac on how to go global
 Assessing the competitive advantage in the chosen countries.
 Forming joint ventures with overseas banks, swapping information,
technology and the human resources.
 Outsourcing the areas Westpac is not strong in and redirects the resources to
its strength.
 Going overseas with the aim of building the sales and achieving economies of
scale.

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 Hiring managers with global perspective.
 Recognizing that the entire business, operation and services are important,
just a brand will not make much of a difference after the initial impetus.
One of the most important factors which Westpac has to consider while evaluating its
foreign market strategy is the cultural forces. Some of the factors contributing to the
cultural composition are:
(Deresky, 2017)
Based on differences in the structure of market, potential size and profitability of
each market, analysis of potential problems in selling and supporting the markets,
analysis of future developments, consideration of foreign exchange and trade
implication & consideration of cultural aspect impacting the entry of Westpac in
Korea, France & Brazil will be accessed and a calculative decision will be taken
based on the finding
Culture
Values &
Attitudes
Communication
LanguageReligion
Social Structure

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Banking Sector in Brazil
The banking system in Brazil in the present era is extremely efficient and effective;
multiple banks in Brazil have internet banking, offering most or all of the products
and services. The network of bank and branches in Brazil is widespread with nearly
all cities in the country having at least one major branch. International operations of
the banks are centralized around the headquarters mostly located in Sao Paulo and
Rio de Janerio (Ahmed, Coulibaly & Zlate, 2017)

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Brazilian central bank is the one controlling the money and the monetary policies of
all the banks in Brazil, according to the central bank, out of the top 10 banks in Brazil
by assets three are state owned banks (Banco do Brasil, Caixa Economica Federal
& Banrisul), five being private Brazilian banks (Bradesco, Itau-Unibanco, Votorantim,
Safra & BTG Pactual) and two being foreign banks (Banco Santander from Spain
and Citibank from USA) (Summerhill, 2015)
Current Features of the Banking system in Brazil
The Central Bank of Brazil(CBZ) has eased the monetary policy in the year 2016 by
lowering the Selic( Special system for Settlement & Custody, it is the Brazilian’s
central bank system for performing open market operation in execution of the
monetary policy) from being as high as 14.25% in October 2016 to 11.25% in April
2017. Inflation dipped to 6.3% in the year ending 2016 and now is expecting to
undershoot to 4.5%. The role of the states in the credit market grew since 2008 with

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public banks holding 55 percent of the total loans to the private sector. The lending
rates in Brazil are high owing to high taxation, repayment risks and prevailing
concerns over the inconsistent judicial enforcement of the contracts and a high
inflation, all the figures are though expected to go down in the forthcoming years.
Four largest commercial banks account for approx. 72% of the commercial banking
sector assets (Bayne, 2017)
The Forex market of Brazil is small, despite growth in the past, the latest study
shows the net daily turnover on the Brazil’s market for OTC foreign exchange
transaction was USD 19.7 Billion, a notch up from USD 17.2 Billion in the year 2013.
The risk of banking liquidity remains low and the same trend will continue for quite
some time.
Performance of the banking systems is a clear indication of the positive outlook for
2018; the Return on Equity reached a figure of 12.1% in June which was marginally
higher by .8% in comparison to December 2016. The GDP of Brazil is growing
annually by 2.415%(2015) and the GDP in the year 2016 stands at 1.796 trillion, all
these figures are promising knowing that country went through global
recession(Lavinas, 2017)
At the same time Australia and Brazil shares history of 70 years of bilateral relation
which can be seen as a promising sign for the future development of the Australia
Bank in Brazil.
Further, PEST analysis will give an understanding about how various forces will play
their role in determining the favourability of the nation.
PEST analysis
The utility of the PEST analysis lies in the fact that it helps to identify various
Political, economic, social and technological factors that may affect the business in
the future. Hence doing an analysis well in advance will help the company make
better decision.

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PEST is relevant to all the industries, but particularly in the better sector it plays a
really important role, the reason being that banks don’t behave independent and are
dependent on the government and the economy.
Brazil is the fifth largest country in the world and the largest country in Latin America
and the South America region. It is 8 largest economies in the world and is home to
many natural resources, natural environment and wildlife. The company recently
suffered recession in the year 2009, but the country’s strong fundamental lead it out
of the crisis. PEST analysis will give a better insight on Brazil.
Political
Brazil got its independence in the year 1980 and in the year 2010 it elected its first
female president Dilma Rouseff and she was re-elected in the year 2014, but due to
certain wrong doing in the government funds she was impeached and Michael
served as the acting president. Hence it can be said that there is no political stability
in Brazil. Corruption is a big issue in Brazil and government charge huge payment if
a small business is getting opened in Brazil; this kind of creates fear amongst the
businesses. A lot of people raised their voices against Dilma for the wrong doing in
the working of government, hence it can be said that Brazil does not have political
stability (Aman, Baer, Trebat & Lora, 2016)
Economical
The country’s GDP was high in the year 2010 but suffered a huge drop in the year
2012 and 2014, now the GDP stands at 1.796 Trillion USD. The country’s potential
can be seen as high due to huge FDI inflows and a large population. The middle
class seems to be growing and the gap between poor and rich is on a declining
trend; moreover the central bank of Brazil has been successful in reducing the risk of
currency devaluation and has also got inflation under control to a large extent. It can
be definitely said that the economy is on an upward trend post the recession in the
year 2009.
Social

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Around 20% of the people live below the poverty line and there is a huge difference
between the wealthy class and the poor class, the rise of the middle class is
definitely a saving factor. Brazilians population is up to date with the new trends and
online penetration has been good in Brazil, the banking habits of the people are
focussed on future investment and hence a lot of securities are being traded in the
country. It can be said that Brazil has to go a notch higher by creating good jobs and
raise the purchasing power of the population.
Technological
The country in comparison to advance economies like US and Russia has a weaker
technology infrastructure, but the government is investing sizable amount of money
to push up the envelope. The country spends around 1.16% to 1.21% in its R&D in
technology. The future of technology in Brazil seems promising.
In Brazil it takes around 120 days to open up a business and the senate and the
companies are treated as separate legal entities. Keeping all the points discussed
above in mind it can be said that Brazil seems to be a favourable destination for
Westpac, but the political environment makes it a little dicey and a tough call to
make.
Banking Sector in Finance
The banking sector in France is currently in a very unprecedented situation, it has to
meet the three major challenges at hand to excel: Digital transformation, a low
interest rate environment and an increasing number of regulatory constraints
(Coleman, 2016)
The Economic condition in France is improving steadily with a slow pace though, a
GDP growth of 1.2% was seen in the year 2016 after having an acceleration of 1.1%
in the year 2015.Domestic demand and increase in export can be seen as the
contributing factors for increase in the investment along with the growth in the
dynamic industrial activity in France (Baum, 2015). The France banking sector has
over 364 Banks, and 6 of the Banks are amongst the Global Systemically important
banks. The financial firms account for almost 4.5% of the total value addition in

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France and of which 60% is contributed by the banks. The banking industry employs
more than 370,000 people at the end of 2015 which represents 2.3% of the private
workforce of France. The 6 largest French banking groups operate in accordance to
the universal banking model and have showed a strong performance in the year
2016, the total net banking income was 145.7 billion pound in the year 2016 and out
of which retail banking activities account for 67%. The sector is burdened with high
tax burden and a large number of European regulatory requirements
Banking sector in France can be seen as a robust sector with the improved
performance shown in the year 2016. France follows a universal banking model and
brings in together a full range of banking and financial services under one single
institution, it can be seen as the USP of Banking sector of France. The Banking
sector in France dedicates around 3.5% of the payroll towards the training of its
employees and it give importance to professional integration and conducts various
work study program to increase the banking knowledge amongst the population
(Kindleberger, 2015)
It can be said that France’s Banking sector is showing signs of growth, but the
growth can be seen as marginal. Further a PEST analysis will give insight on the
Political, economic, social and technological factors which would help in reaching a
conclusion about attractiveness of the banking sector in France.
PEST analysis of France
France is officially known as the French republic and is known as the land of
Perfumery and wine. It is the world’s fifth largest economy and second largest
European economy (Riley, 2014)

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In order to summarize, the French banking sector is on a spree of major reform, but
the Tough European regulatory regulation and a huge tax burden makes it a less
promising destination for Westpac to expand.
Banking Sector of Korea
The banking sector of Korea consist of both banking and non-financial banking
institutions, and Financial services commission and the financial supervisory
services are the regulatory arm which are responsible for supervision and examining
all the banks and its procedures and policies (Bruno & Shin, 2014) The banking
sector risk in Korea has improved marginally to 32 from its previous figure of 32,
which is a fairly good assessment of the banking sector of Korea. The net foreign
asset position of the bank has turned positive in 2014, it moved from US $ 100m in
2014 to US$47.2 Billion in the year 2018.
Bank of Korea is the central bank of Korea and it has spoken in its press releases
that it will leave Won to operate according to the market force and will not intervene
Political
Wide gap between rich and poor
Centralized government with tight control
The govt debt was 90 % of the GDP(2014)
Concentration of power in few hands
Reformist minded politicians
Democratic principle strong rooted.
Economic
Economic recession in the EU did not impact France
as strongly like it hit other states.
Heavy taxes on the population
Public expenditure at 56% of the country's GDP
GDP stands at 2.465 Trillion (2016)
Social
Huge disparity in the rich and poor class.
High crime rate
Unfair treatment of Jewish community (80% being
catholic)
Good Banking Habits
Technological
Leader in the technology export
Good amount is spend on the R&D
Good infrastructure for Banking technology
PEST

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in controlling the currency, until and unless there are some serious concerns. The
year 2014 saw banking sector struggle when HSBC and Standard chartered moved
away from the retail market, banking scandals and excess liquidity in the market also
raised some concerns on the stability of the banking sector. Few additional negative
points against the banking sector are the decline in the corporate profitability owing
to the weakness in the external sector. A low interest rate has led to increasing
household debts which seem to be a problem of concern in the banking sector (Fritz
& Prates, 2014)
Salient feature of the South Korean Banking Sector
 South Korean GDP stands at 1.411 trillion USD in 2016, an increase by 2.2 %
from the FY 2015.
 Raise in the domestic demand and investment shows a positive outlook for
the sector.
 Increase in consumer spending
 2 Internet banks have arrived in South Korea which has caused a major
reshuffle in how people do Banking.
 South Korean banks have shown Higher earnings in the year 2017
 South Korean Banks are looking for globalization themselves and are looking
to expand in the Asian market(Doh & Kim, 2014)
 K Bank and Kakao banks are the internet banks which are giving brick and
mortar banks a run for its money.
PEST Analysis of South Korea
South Korea which is also called as the Republic of Korea is spread across 38,375
square miles and has an estimated population of 50 million. Seoul is the largest city
and the capital of South Korea and is known for its high rise in technology, It boasts
of the highest Wi-Fi sped in the world, and hence it can be said that South Korea is
way ahead in terms of technological infrastructure. It is the 4th largest economy of
Asia and 15th largest economy in the world. It had faced tough challenges during the
Asian financial crisis and is on the path of recovering from the crisis

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In the light of the analysis, it can be said that although South Korea’s banking sector
is looking strong and positive and is continuously looking for improvement in the
banking sector. Somehow there are challenges in its political environment which
makes South Korea not a promising sector. The Korean banks looking towards east
for expansion and abandoning their own country for better opportunities outside is a
sign that there is some trouble in the banking sector and hence Westpac should
avoid entering such a country.
Recommendation
South Korea, France and Brazil, all the countries are awakening from the aftermath
of the financial crisis and all these countries are showing positive reforms and
growth. There are certain challenges in each of the countries which make the other
country look more feasible for expansion. France can be ruled out owing to its slow
growth in the economy and poor banking habits of the individual, at the same time
high tax burdens and increasing European legislation makes it less attractive. South
Political
Centralization of Power
Strong foreign relationships
Political violence
Uneasy relations with North Korea
Political will for economic reforms
Economic
Strong export sector
Declining FDI
Growing hatred for foreign companies
Implementation of Free trade agreements
Low intensity of competitveness
Social
High wages
Increased urbanization
Risisng awarness of Human rights
Ageing society
Rising power of labor unions
Technological
Robust telecom sector
High regulation in governance
Rising R&D costs
Highest internet speed
Rising costs in R&D
PEST

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Korea seems to be in troubled water due to rise of two internet banks, which are
changing the entire banking sector of Korea, also , the economy is recovering slowly
and exit of HSBC and Standard Charted banks show that it is not feasible to expand
in South Korea.
Brazil on the other hands look a far better destination than both South Korea and
France, it has a stable and fast paced economy, seventh largest economy in the
world makes it more attractive. The efforts of the government are focussed on
improving the economy and in several press releases it has been mentioned that
Brazil will do certain reforms to improve the banking sector. The rise in FDI and
strong demand from the domestic market makes the country more appealing. The
population of Brazil is also looking for a player which will improve the ways banking
sector operates. Australia has strong ties with Brazil which will further pave a smooth
road to entry for Westpac into the heartlands of Brazil. Hence, Westpac should not
get into any M&A, albeit is should do a Greenfield investment and start from the
scratch and be on a mission to make a difference. The way Westpac has improved
and strengthened the banking sector in Australia, it is expected to create a similar
story in Brazil.
Conclusion
Westpac group being a 200 years old group is one of the finest banking institutions
of Australia and New Zealand; it has created wonders for Australia in terms of
developing banking habits in the people and revolutionizing the way banking
operates. Westpac is also a responsible company which through its corporate social
responsibility work towards environmental sustainability. It is strongly recommended
that Westpac expands into the heartlands of Brazil, primarily owing to the developing
economy, High GDP and a strong growth potential. Less intervention of the
government in the banks makes it more attractive and scores a plus point for
Westpac. Westpac is at the stage where it has all the Human resource, Processes,
policies, technology to expand, and Brazil is the ideal market for its expansion
opportunities.

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emerging market economies: How important are economic fundamentals?. Journal
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