US banks are bucking the global downward trend but elsewhere, many others have seen profits tumble, as Stephen Timewell reports.Research by Terry Baker-Self, Alice Partridge & Beata Ghavimi
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The global economic slowdown continues to have a damaging impact on many banking markets but not all. Unlike 2001 – when the total profits of the Top 1000 world banks fell by a massive 29.7% – in 2002 overall bank profits showed good signs of recovery, and US banks in particular demonstrated that healthy profits could be made in so-called difficult economic circumstances.
In The Banker’s latest listing, the total pre-tax profits of the Top 1000 banks grew by 13.3% to reach $252.4bn. This improvement on $222.8bn the previous year includes the $39.3bn in pre-tax losses posted by the 114 Japanese banks, which in itself is an improvement on the $50.1bn in losses recorded the year before.
The key factor in this year’s Top 1000 is the strong performance of the US banks (see page 159). This not only showed what could be done in a tough, low interest rate environment, but also showed their strength in the global arena, especially in relation to poor performers such as the Japanese and German banks.
Strong US performance
The pre-tax profits of the 210 US banks in the Top 1000 rose by a staggering 25.8% in 2002 to $124.1bn. This meant that these banks contributed 49% of the profits of the Top 1000 (up from 44% the previous year) and produced an average return on capital of 23.16% – a strong performance under any economic conditions.
Banking in the US has become stronger (average return on capital the previous year was 20.14%), with growth coming from core commercial and retail banking activities, especially in the mortgage and personal finance sectors. Of the 210 US banks, only two reported losses in 2002 and 179 reported improved profits, a healthy result.
US bank performance contrasts sharply with the continuing heavy losses at Japan’s banks (see page 148) and the weakness of Germany’s banks. The profits of the 83 German banks disclosed amounted to $2.7bn, effectively only 1.1% of the Top 1000 total and producing a low aggregate return on capital of 6.76%.
Return on capital rises
While aggregate profits have improved, they are still well below the peak of two years ago when the total reached $317bn. Nevertheless, the aggregate return on capital for the Top 1000 rose to 12.8% from 12.3% the previous year.
The top end of the listing contains few surprises this year. Citigroup tops the list for the fifth year in a row, but Royal Bank of Scotland has burst into the Top 10 banks at seven and the Japanese continue to drift out of the top echelons. It is worth noting that 10 years ago, Japanese banks not only occupied the first six places in The Banker Top 1000 but also had 11 out of the Top 25 banks. Today there are only four in the Top 25, headed by Mizuho Financial at six.
Citigroup – giant of giants
Citigroup goes from strength to strength and is by far the largest bank in the world in terms of capital ($59bn) and with pre-tax profits of $22.8bn in 2002, it is also one of the most profitable, producing a return on average capital of 38.8%.
Citigroup leads Bank of America, at two, and four other US banks in the Top 25. While JP Morgan posted slightly reduced profits, BoA (with expansion of 25.4%), Bank One (28.3%), Wells Fargo (62.2%) and Wachovia (103.9%) all showed significant profit growth – an excellent effort. Although the Top 10 US banks have less of an international presence than in the past, they have enormous clout in the US, accounting for 57.9% of total profits of the US banks in the listing, as well as 56.9% of Tier One capital.
In a year when many European banks, such as Germany’s HypoVereinsbank, took a pasting and acquisitions were very scarce, Royal Bank of Scotland did well to boost profits, acquire new banking assets in the US and jump from 13 to seven in the global ranking. Crédit Agricole and HSBC also moved up but the two big Chinese banks, Bank of China and ICBC, slipped down slightly.
The Top 25 world banks continue to dominate the global banking scene. This year the Tier One capital of the Top 25 amounts to $677bn, 34.3% of Top 1000 total. While this percentage stayed the same as the previous year, the trend in recent years has been for the Top 25 to take a bigger and bigger stake. In assets, the Top 25 continued to grab market share and this year accounted for assets of $167.5 trillion, 38.1% of the aggregate Top 1000 total, compared with 36.9% in last year’s listing.
Japanese slip on assets
The lead positions in the Top 25 by assets have also changed. After years in the prime position, Japan’s Mizuho has been edged out by Citigroup ($1097bn) after suffering an 11% decline in assets in yen terms.
Unsurprisingly, the other top Japanese banks have also slipped a little, while Switzerland’s UBS moved up the listing into third place (from seventh) with assets of $852bn. The top asset banks are now spread relatively evenly by country with the Top 25 broken down as follows: Japanese – five, UK and Germany – four each, the US and France – three each, and China, Switzerland and the Netherlands – two each.
With regard to market capitalisation, Citigroup again shows its superiority. At $234bn, it is more than $100bn ahead of its nearest rival, HSBC ($133bn). The rest of the list compiled at June 16, 2003, looks much the same as last year’s, apart from Lloyds TSB slipping from eighth to 17th with $42.8bn and Sumitomo Mitsui crashing out of the Top 25, along with Bank of New York and the Commonwealth Bank Group.
New entrants
This year’s Top 1000 contains 55 new entrants, down on last year’s listing of 79 arrivals. While many of these are the result of name changes, there are 11 new US entries and four new Russians. The largest of the new entries comes from Iran, with Bank Keshavarzi appearing in 212th place.
We also include this year a new table of the highest movers. Forty banks moved up by more than 100 places, led by Turkey’s TC Ziraat Bankasi, which rose 328 places to reach 141.
This year the Tier One capital of the Top 1000 rose by 7.8% to reach $1974.1bn while the total assets rose by 10.8% to hit $43,909bn and net total pre-tax profits recovered, growing by 13.3% to $252.4bn.
The US banks’ performance requires particular mention and reflects on the lesser performance of banks from other countries. In brief, the 210 US banks, which account for only 24% of the capital and just 16% of the total assets, managed to produce 49% of the profits. The 285 European banks, by comparison, which account for 40% of overall capital and 46% of assets, could manage only 43% of the profits.
While this highlights the US banks’ much better profitability than the those of the EU, it also shows that combined they account for 92% of the Top 1000’s net profits. This large percentage indicates the lack of profits coming out of other regions, particularly Japan.
Winners and losers
This year’s winners listing includes some familiar names and some new faces. In Tier One, Citigroup, HSBC, Mizuho, Banco Itaú and Standard Bank win again, Bank of China is back on top in Asia along with Bank Leumi in the Middle East and Sberbank wins in central and eastern Europe.
In return on capital for 2002, Zimbabwe’s NMBZ Holdings wins the Global and African award with a return of 115.3%. Other major profitmakers are Turkiye Halk Bankasi (59.6%) in Western Europe, National Bank of Pakistan (55.6%) in Asia, Libyan Arab Foreign Bank (49.2%) in the Middle East, PKO Bank Polski (57.8%) in CEE, Banrisul (46.3%) in Latin America and Marquette Financial (79.5%) in the US.
The outlook
What will happen in the future? The US banks, on recent 2003 results, continue to show bullish profit trends based on buoyant retail and consumer banking markets. This could tail off but analysts suggest that a US recovery is on the way, which could in turn help to boost other areas of US banking.
While Japanese losses have declined, there is no long-term solution to the country’s non-performing loan problems and until decisive action is taken, large losses are likely to continue regardless of the banks’ over-optimistic forecasts.
The key question is: how can more of the world’s banks achieve the profitability that the US banks have managed? While many European banks are doing well, severe structural issues – such as the large number of low profit institutions in Germany – are a drag on progress. There is still a lot to be done.
