Top 1000 Banks

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Top 1000 World Banks 2011

By Philip Alexander | Published: 30 June, 2011 | (3 comments)
Top 1000 World Banks 2011

Global banking profits are now approaching their 2007 pre-crisis peak, but the divergence between growing and stagnant markets is becoming increasingly stark. 

The good times are back – but not for everyone. After just one year’s deleveraging in The Banker’s Top 1000 World Bank ranking last year, assets are growing again, by 6.4%, to cross the $100 trillion mark for the first time. And profits are soaring, up 77% to $709bn for the 2010 financial year, just $80bn short of the pre-crisis peak in 2007.

Banks are also continuing to step up their capitalisation levels. Total Tier 1 capital for the Top 1000 rose 10.5%, to $5433bn, comfortably outpacing the growth in assets. This means the trend towards higher capital-to-assets ratios worldwide continues unabated. Among the 25 largest banks by Tier 1 capital, capitalisation is rising even more sharply – Tier 1 capital was up 12.1%, whereas assets grew more slowly than for the Top 1000 as a whole, by 5.9%.

Top 1000 aggregates

Of course, some of the largest losses in last year’s ranking were among those top 25 banks, and 2010 marked a significant turnaround for many of the most troubled players. The US in particular has enjoyed a much-improved performance,  with Citigroup, Bank of New York Mellon, State Street, GMAC, Keycorp and Huntington Bancshares – all among the top 25 largest losses last year – this year recording substantial profits. Outside the US, other banks that jumped from biggest losers to big profits include UBS, Russia’s VTB, Dutch bank ING and two of Germany’s largest banks.

In total, 105 banks returned to profit in this year’s ranking from last year’s losses , whereas only 14 have tipped from profit to loss. The most dramatic story here was the largest bank in the Top 1000, Bank of America, which tumbled from a profit of $4.4bn in 2009 to a pre-tax loss of $1.3bn in 2010. However, this is primarily an accounting story rather than an asset quality story, as changes in regulatory rules forced the bank to write down credit-card assets. It also took a goodwill impairment on the legacy value of Countrywide, the troubled mortgage lender it bought at the height of the financial crisis in 2008. Reported non-performing loans (NPLs) actually improved dramatically , falling to 3.27% of gross total loans, from 7.64% the previous year.

Tier 1 capital to assets ratio
Regions by total Tier 1

Eurozone doldrums

The more profound question is about the long-term sustainable performance of banks in the largest markets. Numerous US regional banks that were heavily exposed to poor mortgage underwriting standards remain among the top 25 largest losses list, five have suffered losses equivalent to more than 40% of their capital, and further consolidation or closures seem likely. In June 2011, the US authorities approved the takeover of Marshall & Ilsley, the US bank with the worst losses aside from Bank of America, by Canada’s Bank of Montreal, and M&I will depart from the ranking next year.

The picture in the eurozone and UK is perhaps even more troubling.  While total US profits were up 194%, those in the eurozone rose 84%, and NPLs jumped by 54% – compared with less than 20% in the US. Of the 10 countries where the largest declines in total assets took place, all were in the EU except Andorra, and all but three were in the eurozone. Meanwhile, in the UK Tier 1 capital and assets both fell. Among the top 25 banks worldwide, all UK and eurozone banks slipped in this year’s ranking, except for the heavily Asia-focused HSBC – with Société Générale and Intesa Sanpaolo sliding out of the top 25 altogether.

This is partly explained by exchange rate developments – our ranking is compiled in dollars, and both the euro and sterling depreciated against the dollar in 2010, by 7.8% and 3.6%, respectively. An additional factor is the poor quality of data provision from Germany. We have long advised banks participating in this survey that we would eventually eliminate banks that did not provide timely results. This year, with fill rates from most banks exceptionally high, all the data displayed here dates from financial years ending in 2010 – or even 2011 in some cases such as Japan.

But German sparkassen (savings banks) tend to submit end-year data only with substantial delays, which resulted in 27 sparkassen being omitted from this year’s ranking. In this era of growing focus on bank disclosure and reporting ahead of Basel III, we clearly hope to improve this situation, and we are co-operating closely with the Deutscher Sparkassen- und Giroverband to try to restore as many of these banks as possible next year. In the meantime, the total number of German banks included has fallen from 66 to 36, which will naturally affect aggregate capital and asset figures for Germany and the eurozone.

Top 25 largest profits from previously loss-making banks

Europe's struggles

Even so, there are also numerous loss-making banks in the eurozone dragging down profit and capital figures. In Germany, two of the major casualties of the financial crisis, IKB and Hypo Real Estate, continue to haemorrhage money. So too does Royal Bank of Scotland, while Austria’s Hypo Alpe-Adria continues to be hit hard as a turnaround management team appointed by the government reclassifies its loan portfolio.

And while these four banks are gradually narrowing their losses, the same cannot be said for Ireland, where Anglo and Allied Irish Banks between them suffered losses equivalent to three and a half times their total Tier 1 capital. The Irish banks all feature prominently on the worst losses list. Only Irish Life & Permanent has submitted its NPL ratio for this survey, at 8.9%, but Anglo-Irish has disclosed NPLs of almost 50% in its 2010 annual report, and it sold further troubled assets to the National Asset Management Agency at a 62% haircut.

By contrast, while attention focuses on Greece, it is striking that only one of the top four Greek banks suffered a loss in 2010 – EFG, the Luxembourg-based holding company for Eurobank. This is a testament to the conservative underwriting and funding strategies of these banks prior to the crisis, but seems unlikely to continue if a major sovereign restructuring occurs in 2011. However, the Top 1000 certainly underlines the starkly different stories between the eurozone’s two most troubled peripheral members. In Greece, previously successful banks have been laid low by the failure of sovereign fiscal management. In Ireland, the government has been brought down by a catastrophic banking system failure.

Asia-Pacific rising

Beneath these headline stories of individual bank failures, there are growing signs of a deeper malaise for western Europe. Since the peak of the market in 2007, the US shares of both global assets and profits have actually grown – from 11.9% to 12.9% in the case of assets, and from 14.5% to 16.1% for profits. For the largest European banking markets, only France has enjoyed an increase in its share of profits, while its asset share declined slightly. In Germany, the UK and Italy, the share of profits has more than halved (to 1.7%, 5.1% and 2%, respectively), and asset shares have also suffered.

By contrast, China’s share of global profits has more than doubled to 21% between 2007 and 2010 , and Chinese bank assets grew by 44% in the 2010 ranking alone. Last year, a Chinese bank, Industrial Commercial Bank of China, entered the top 10 for the first time. This year, there are already two other Chinese banks joining ICBC in the top 10, and Agricultural Bank of China is knocking on the door thanks to a $22bn initial public offering in August 2010 that lifted it 14 places to 14th.

Japanese banks also fair well in this year’s ranking , with Mitsubishi UFJ taking back the top Asian bank spot from ICBC. Two others, Mizuho and Norinchukin, re-enter the top 25, both recording profits after being among the top 25 largest losses in the previous ranking. All the major Japanese banks saw year-on-year profit growth of at least 50% in the financial year ended March 2011.

Technical and exchange rate factors play a part here. The yen appreciated more than 11% in 2010, and Japanese banks have delivered more timely data – most figures in last year’s ranking were for the financial year ended March 2009. While percentage change figures in our ranking are all calculated year-on-year, the jumps in the ranking are explained partly by the two-year gap in reporting. Even so, it is clear that Japan’s largest banks had stabilised prior to the earthquake in March 2011, and a capital-to-assets ratio that increased from 4.1% in last year’s ranking to 4.7% this year should provide some protection from losses that result from the catastrophe.

Where banks make their money

More broadly, Asian banks are beginning to show sustained outperformance relative to the most developed markets, and even compared with other emerging markets. Four of the 10 top countries for asset growth in 2010 were in the Asia-Pacific region , more than any other region. Seventeen of the top 25 banks for asset growth are from China, with one each from Vietnam and Australia.

And this is profitable growth. Eight of the top 25 countries for profit on average capital are in Asia. In fact, all but two of the top 25 are emerging markets. Among the developed countries, only Australia (itself enjoying close economic ties to Asia) and Canada are among the top 25 for profit on capital – both of them major commodities producers.

Pakistan tops the list, but in the context of very low bank penetration. In a country of 175 million people, there are just four banks in the Top 1000, with total assets of $43bn, equivalent to 26% of GDP. The number three market, Indonesia, is perhaps the most spectacular story because the banking sector is a little more mature – though it still has plenty of room to grow by Western standards. The nine banks in the ranking have assets equivalent to 40% of Indonesian GDP, and recorded profits on average capital of 31.2%, even with a very high average capital to assets ratio of more than 9%.

Only two European countries feature in the top 25 for profits on capital – Turkey and Hungary. The latter is an anomaly, because there is only one locally owned bank in the Top 1000, OTP, which recorded impressive profits of $930m in 2010. Much of the sector is foreign-owned, and these banks were the most exposed to retail lending in foreign currencies, which backfired when the forint weakened in 2008-09. Once those foreign-owned banks are factored in, Hungarian banks recorded an aggregate pre-tax loss.

In Turkey, by contrast, much of the sector remains locally owned, and every bank in the ranking is profitable. For historic reasons, The Banker  includes Turkey in western Europe, and three of the top five banks in western Europe by return on capital are Turkish. One of the other two, Home Credit, is headquartered in the Netherlands, but almost all of its business is in retail lending in emerging markets, including Russia, Vietnam and China.

Top 25 countries by profits

Getting the mix right

This raises an interesting question about the business mix that makes for a growth market in banking. It is notable that the bank with the highest return-on-capital for central and eastern Europe – Getin Noble in Poland – has a similar business model to Home Credit, focusing on consumer and mass-market retail lending. It is a high-risk business model, but one that retained relatively high returns even during the financial crisis, thanks to strong and centralised credit control that allowed these banks to adjust underwriting standards very quickly to cope with deteriorating market conditions.

Data points for a more general assessment of the business mix in high-growth markets are scarce, but improving. The Banker  has started collecting retail customer numbers, but fill rates are still low – this should improve over time. The fill rate for the category 'loans to corporate customers' as a percentage of total loans has doubled this year, although it is still low at 42%. From this data, it is possible to compile an approximate picture of the extent of corporate versus retail lending in the countries present in the Top 1000.

A number of the countries with the highest profits on capital have banking sectors skewed toward corporate lending. In the Philippines, Chile, Colombia, Vietnam and Turkey, loans to corporates are about 60% of the total loan book – and more than 70% in the case of Egypt. This offers good potential for increased retail lending in the mix. But this is not uniformly the case. In Brazil, corporate lending is only 37% of the total, and in Indonesia just 20%.

Finally, a word of caution on Brazil, which has the second highest profit on average capital. Although profits have risen more than 50% since the start of the financial crisis in 2007, rates of return are actually declining compared to the pre-crisis era. Profit on capital is down almost 12%, and return on assets is down 23%. Brazilian banks are leveraging up – assets have more than doubled since 2007, but Tier 1 capital has only grown by 68%. The capital-to-assets ratio, though still high this year at 7.59%, has dropped from 8.12% in last year’s ranking. These are perhaps early signs that the remarkable Brazil growth story, which has seen its banks increase their share of global profits from 3% in 2007 to 5% in 2010, might be set to slow over the coming years.

Top 25 banks by asset growth

Impending regulatory challenge

In addition to finding markets with good growth potential, the major challenge facing banks is a regulatory one – the slow but inexorable move to Basel III bank regulations by 2018,  a transition that is due to start in 2013. Last year, we flagged up the extent to which some banks had maintained apparently healthy capital adequacy ratios according to Bank for International Settlements (BIS) Basel II methodology, while significantly reducing their pure capital-to-assets ratio .

This was achieved by assigning very low risk weightings to a bank’s assets under the Basel II treatment. But under Basel III, it may be difficult for some banks to retain very low ratios of risk-weighted assets (RWA) to total assets, as there will be tougher assessments of credit, market and counterparty risk.

Among the 25 banks with the lowest ratios of RWA  to total assets, most have innocuous explanations and will be largely unaffected by Basel III. This includes deeply restructured banks that are derisking their portfolios, such as Hypo Real Estate in Germany or Irish Life & Permanent. There are also a number of wealth management specialists in Switzerland and elsewhere which carry out very little lending activity on their own balance sheet.

Lowest 25 Banks by RWA

Additionally, there are state-owned policy banks such as Waterschapsbank in the Netherlands or Rentenbank in Germany, which lend primarily to public and municipal sectors, and therefore incur low risk weights on their assets. But three large investment banks The Banker  mentioned last year for their high proportion of market-risk-weighted assets – UBS, Deutsche Bank and Credit Suisse – are also on this list. The advent of Basel III could add significantly to the value of their RWAs, requiring either deleveraging or an increased capital base.

The other element of Basel III that can affect bank’s capital needs is the much tougher treatment of Tier 2 as a form of loss-bearing capital. Fill rates in The Banker  survey for Tier 2 capital are improving, and we have been able to compile some country aggregates for Tier 2 as a proportion of total capital – with sample sizes included to give an indication of whether the number of banks providing data is statistically significant.

Israeli banks top the list, but their high proportion of Tier 2 capital is offset by very strong overall capitalisation. Their average BIS ratio is 14%, and the aggregate raw capital-to-assets ratio is 6.8%, more than a percentage point higher than the aggregate for the Top 1000 as a whole. To some extent, the same is also true for India and the Latin American countries  that are high up this list.

Top 20 countries by Tier 2

Tier 2 prevalence

Ratings agencies have already been warning about the prevalence of Tier 2 capital in Italy, Germany and Austria since the first Basel III draft was unveiled in 2009. But it is interesting to note that two other heavy Tier 2 issuers during the boom years – France and the UK – are not on this top 20 list, as issuance of common equity and the conversion of Tier 2 into new Basel III-compliant formats has evidently reduced the proportion of Tier 2 in the total mix.

By contrast, banks are at an earlier stage of getting to grips with the liquidity requirements of Basel III. Thanks to a significant improvement in data provision, we are able to calculate loan-to-deposit ratios for more than 90% of the Top 1000 this year, compared with about 50% last year.

Lebanon, the private banking centre for the Middle East, tops the list for ultra-low loan-to-deposit ratios.  It is noticeable that emerging markets dominate the list of countries where banks are very liquid thanks to high deposit funding. Barbara Ridpath, the chief executive of the International Centre for Financial Regulation (ICFR), says these countries may have cause for complaint that the Basel III liquidity regulations seem to be unfavourable to their banks.

While these banks’ deposit funding means their liquidity risk is low, they may struggle to find local assets suitable to hold in their liquidity buffer based on Basel definitions. These definitions favour the sovereign debt of the most-developed economies over that of emerging markets, even though many emerging markets have better debt dynamics.

“This could force emerging market banks to hold US or western European treasuries in their cash reserves, which would then expose them to exchange rate risks,” says Ms Ridpath. All rather unfair, given the healthy loan-to-deposit ratios in so many emerging markets.

At the other end of the scale, it is no surprise to find Ireland at the top for the highest loan-to-deposit ratios. The unsustainable funding model of Irish banks before the crisis has been compounded by the forced transfer of deposits out of Anglo-Irish by the Irish government, and general deposit flight, especially among UK-based savers.

More interesting is the extent to which the strong pensions and investment funds industries in the Netherlands and Scandinavia constrain the ability of banks in these countries to fund their activities through deposits. It is little wonder that Dutch bank ING adopted the bancassurance model, which is now set to be demerged to comply with EU competition and state aid rules following the Dutch government’s assistance to the bank during the financial crisis. As noted in our derivatives supplement this month, Basel III liquidity requirements will oblige banks to think hard about their relationship with the insurance and pensions industries, to avoid an unhealthy war for savings.

Meanwhile, it is noticeable that some of the eastern European countries  such as Ukraine and Kazakhstan that were heavily reliant on wholesale borrowings to fund their rapid expansion during the boom have already scaled back their loan-to-deposit ratios substantially. By contrast, it is perhaps a surprise to see Brazil turn up on the list of high loan-to-deposit ratios, at 132% – perhaps another warning sign for the banking boom there.

Top 10 loan-to-deposit ratios

Onwards and upwards

And finally, a word of thanks to our dedicated research team, and to all the banks who participated in this survey, who have helped to drive a massive improvement in data fill rates and timeliness this year. The US banks have the best data fill rates, partly thanks to the comprehensive regulatory disclosure requirements to the Federal Reserve. The Fed publishes most of this information publicly – although interestingly, the income statement for Barclays’ US subsidiary, which includes the former Lehman Brothers operations, was kept confidential.

Similarly, following the widespread state rescues in the sector, the German authorities have demanded very high levels of disclosure from the landesbanken (in marked contrast to the sparkassen), with many landesbanken providing very detailed information on their assets and asset quality.

Bottom of the list for data fill rates is Iran – we look forward to improving on that next year. On the other hand, a special mention goes to the country where banks were keenest to fill in our online survey form, which allows us to collect a broader range of data, in a format that is directly comparable globally. The winner this year was Russia, perhaps challenging some stereotypes about transparency in the country’s banking sector. We encourage all our participants to provide data online next year, to carry on making this ranking an even more useful tool for everyone.

The research for The Banker’s Top 1000 rankings was carried out by Adrian Buchanan, Guillaume Hingel, Charles Piggott, Valeriya Yakutovich, Alberto Berardi and Xavier de Villepin.

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