...The traditional banking landscape, dominated by the US and Europe, is shifting.
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...the US banks have taken a battering as a result of the financial crisis and profits in the 2008 Top 1000 listing were down more than 40% on the previous year to $112.8bn. The critical aspect is that the role of US banks, which was once dominant, is in serious decline.
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US banks’ profits in the 2008 listing were just 14% of the Top 1000 World Banks aggregate profits, compared with 24% last year and a huge 49% five years ago in The Banker’s 2003 listing. The role of US banks is also slipping in other areas – in the 2008 listing aggregate, Tier 1 capital slipped to 16% from 19% the previous year and aggregate assets fell to 11% from 13% in the 2007 listing. And in aggregate terms on profitability US banks usually lead the world, but this year have fallen to a 17.9% average return on capital, below the reduced global average return on capital of 20%.
Are US banks losing their grip? Some will argue that they will bounce back, and Citigroup’s profits of just $1.7bn will not be repeated. Perhaps so, but the trend suggests that banks outside the traditional developed world are growing, and the dominance by US banks and also the Europeans is diminishing. For example, the number of US banks in this year’s listing fell to 169 from 185 last year and from 210 banks five years ago in the 2003 listing.
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While some of the impact of the US subprime crisis and the credit crunch can be seen in the 2008 listings, it is not the whole picture, as a lot more financial damage has emerged in recent months that will only be seen fully in our 2009 rankings. In analysing the bank write-downs/credit losses and capital raised since the beginning of 2007 until end-May 2008, the Washington-based Institute of International Finance (IIF) calculates that the total worldwide bank losses during this period amounted to $386.7bn, with the total capital replenishments reaching $276.4bn (see page 142 for bank breakdowns).
The total losses here, only partially reflected in 2007 bank results ($235.6bn applying to calendar 2007), show that the Americas and Europe took the biggest hits with $165.7bn and $199.6bn respectively, followed by Asian institutions with a modest $21.4bn. The capital replenishments follow a similar pattern with the Americas and Europe raising $141.3bn and $125.5bn respectively, followed by Asia with $9.6bn.
How high the write-downs and losses will go remains to be seen but, according to recent Bloomberg and Accenture research, estimates of such losses could go well beyond the $380bn at end-May 2008 and could reach a total of $1200bn. Interpretation, however, is key to understanding the impact of the credit crunch on banks’ results, and in particular what goes to reserves and what hits the income statement.
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...Despite significant write-downs and losses in the financial crisis by European banks, the 266 EU(27) banks in this year’s listing, compared with 279 last year, managed to maintain their share of the Top 1000 World Banks in all areas. The EU(27) banks held on to 42% of aggregate Tier 1 capital, 53% of aggregate assets and 41% of aggregate profits despite the crisis. In terms of profitability, EU(27) banks, at 19.7% return on capital, were down but close to the global 20.0% average. The 184 Asian banks, up from 174 last year, now account for 19% of Top 1000 profits, up from 12% last year, with Tier 1 capital up to 15% from 14% and assets steady at 12% of the Top 1000 aggregate. One cannot ignore that there are three Chinese banks in the world’s top 13 banks whereas five years ago there were none, and Asian banks (excluding Japan) accounted then for just 10% of profits.
While the role of the 98 Japanese banks in the Top 1000 remains flat or in decline, accounting for 10% of capital, 9% of assets and 6% of profits, other regions, such as the 97 Middle East and 47 Latin American banks are expanding but from very low bases. Middle East profits have risen from 3% to 4% of the Top 1000 and Latin profits have doubled to 4%.
...This year UK-based HSBC Holdings took the crown as the world’s largest bank after nine years of US domination...HSBC roared into first place with a 19.5% expansion of Tier 1 capital to $104,967m, well ahead of Citigroup which remained second but whose capital slipped by 1.8% to $89,226m. From eighth place last year, Royal Bank of Scotland rocketed into third this year with capital jumping a huge 47.7% to $88,888m as a result of the ABN AMRO acquisition. RBS now becomes one of the six titans, pushing out France’s Credit Agricole Group while Bank of America drops from leadership to fifth place with a sizeable 8.4% decline in capital.
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In this Top 1000 analysis, The Banker also provides a Top 25 listing based on market capitalisation data as at June 12, 2008 (below). This year’s market capitalisation listing looks very different to last year’s and also differs significantly from the Tier 1 ranking. This year, China’s three largest banks, led by ICBC, take three of the top four places, asserting China’s increasing role on the world stage, and last year’s market leader Citigroup drops to ninth following its massive share price fall. As US banks slip down the table, banks such as the Chinese and Spain’s Banco Santander (seventh) are taking the leading positions. HSBC, the leading bank by Tier 1 capital, maintained its third-place ranking in this table.
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Looking closely at the Top 1000, the 2008 ranking includes 83 new entrants, 45 last year, with China Everbright Bank heading the newcomers at 195th place (page 166) and in terms of the fastest movers (page 165) 79 banks moved up more than 100 places in the listing led by Nigeria’s Oceanic Bank, which leapt a staggering 565 places to 310th place.
Looking to the future, the four-year onward march of expanding bank profits and profitability has been halted, and the 2008 ranking reflects the impact of the financial crisis that began last August and has yet to be fully played out. Given the reduced global economic outlook for 2008, with growth estimated by Fitch Ratings at 2.6%, and major concerns about growth in the US and UK, 2008 bank results look flat at best in developed markets, with emerging economies likely to pick up the slack.
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