Two Latin American countries score highly for return on equity in their banking sectors, but more highly capitalised African banks enjoy stronger return on assets.
Venezuelan banks were on top of the world in 2012 in terms of aggregate return on Tier 1 capital. At almost 58%, their aggregate return on Tier 1 capital was almost 14 percentage points higher than second placed Sri Lanka. This is a strong performance from Venezuela, a country subject to periodic liquidity crises and labouring under a dual exchange rate regime. In fact, two Latin American countries feature among the top three banks by this measure, with Argentina recording a 42.4% return.
In both cases, high inflation plays its part, driving up interest rates and generating high returns. Official inflation in Argentina is more than 10% year on year, but a number of economists have been threatened with prosecution for suggesting that the real rate is significantly higher. In Venezuela, meanwhile, consumer price inflation has soared to more than 45% in mid-2013, from 20% at the start of the year. Inflationary pressures are a common theme running through most of the high-return banking sectors worldwide. Inflation rates of 6% or more prevail in all of the top 10 countries except Peru, which keeps price rises to a much more modest 3.3%.
African advantage
An additional factor that can boost return on capital is the size of the capital base itself. Running on a thinner capital base means better returns for shareholders, but it also poses a greater risk, as the bank has a limited cushion if it suffers losses. Looking at countries’ return on assets perhaps represents a truer reflection of profitability. This measure favours African banks, which tend to be heavily capitalised to protect against losses. Kenya moves to the top of the profitability league when ranked by return on assets.
Nigeria’s banking sector capital buffers have been radically strengthened since the bankruptcy of some of its largest players in 2009, and it features on the top 10 for return on assets. Another crisis recovery story, Iceland, scores relatively low for return on capital after the creation of three new, well capitalised clean banks in 2009. But its return on assets carries it well into the top 10.
At the other end of the scale, the worst performers are consistent across both return on capital and return on assets. Predictably, the bottom five are all crisis-hit eurozone countries, namely Greece, Portugal, Spain, Ireland and Slovenia. Lurking just above is Kazakhstan, where a large increase in provisioning charges at one bank required by new regulations pushed the sector as a whole into a loss.
