Internationalization of the Cypriot Banks

By Andreas Petrou

Cyprus International Institute of Management

 

The recent developments in Cyprus banking are driven to a large extent by the banks’ desire to grow through further internationalization in the region. This article addresses the issue of internationalization for the Cypriot banks and suggests actions for increasing their capabilities in this area, given that internationalization is a major pillar of their strategy.

Successful internationalization requires significant international experience which often accumulates over time by doing the right things, i.e. servicing relevant countries and relevant markets. When the target region is South East Europe, servicing developed countries like the UK, does not help to accumulate relevant know-how, as economic conditions, business practices and cultures are very different. Furthermore, servicing overseas clients from home may not have any significant contribution to experience, if the target markets are broad local markets such as SMEs and retail customers.

International operations of Cypriot banks focused on servicing clients from home with the exception of Greece, which may be attributed to the familiarity of culture and the common language. However, culture and business practices in the countries of South East Europe such as Romania, Bulgaria, Ukraine and Russia are different. Consequently, the above may suggest that Cypriot banks do not have the experience required to successfully internationalize in this region and must find a way to acquire experience fast.

The low risk start-up entry mode, employed in most countries so far, is not suitable for entering this region, as it is too slow in acquiring experience and business volumes and it is unsuitable for banks that aim to become substantial players in the region. Acquisitions seem to be a more appropriate entry mode for these banks, however, given that local banks are targets of many predators, they must act fast.

Acquisition is a vehicle for fast growth and learning but acquisition targets must be pursed selectively because they entail significant risks for two reasons:

1. Significant cultural differences and  relatively low experience in dealing with these markets increases information asymmetries, i.e. a bank’s ability to confidently evaluate the suitability of an acquisition target

2. There is no significant track record in integrating cross-border acquisitions

Consequently, Cypriot banks should target, to begin with, small local banks, which can provide the means for entering a market and learning fast with lower risk. Marfin Popular Bank’s agreement to purchase Marine Transport Bank in the Ukraine and the Bank of Cyprus announcement of their intention to buy small banks in the region are steps in the right direction. To prepare for these and further initiatives they will need to create the following capabilities:

1. Create the ‘100 days’ integration capability. This involves the creation of a swot team with strong business, technology and project management skills, headed by a senior manager, that will take responsibility for fast integration of the acquired bank.

2. Develop a solid and flexible technology platform which will replace the IT systems of all acquired banks. Technology is the biggest obstacle to bank integrations and should be addressed proactively.

3. Create the concept of the ‘international manager’. These are high-calibre managers, with abilities to work across cultures and manage change. Given that these managers are in abundance, they should be cultivated and used as the change agents in foreign operations.