The global economic recovery and the return to profitability of the Japanese banking sector after massive losses has helped to produce record profits in the Top 1000 banks worldwide. After a damaging drop in profits of 29.7% in fiscal 2001 and a modest recovery the following year, fiscal 2003 proved to be a bumper year for banks around the globe.
Aggregate pre-tax profits of The Banker’s Top 1000 banks jumped from $252.4bn in last year’s listing to $417.4bn in this year’s listing, a mammoth 65.4% increase and $100bn more than the previous record profits year in fiscal 2000.
The surge in profits reflected improved economic growth led by the US, whose banks continued to lead the way in terms of profitability. A marked improvement in business confidence in 2003, following two years of uncertainty and caution, provided the basis for an exceptionally good year for banks, and exchange rate movements against the US dollar further strengthened non-US banks in the listing.
Japanese comeback
Another key shift was Japanese banks’ efforts to claw their way back into profit. While significant problems still remain, the 113 Japanese banks in the Top 1000 were able to report an aggregate $14.9bn in net profits – a significant turnaround from the $39.3bn aggregate net losses recorded last year.
This swing of more than $54bn in profits from banks in the world’s second-largest economy represents an important stage in the recovery of Japanese banks, which have experienced more than a decade of poor performance.
Driving force
As in the previous year, the 211 US banks represented here provided the driving force behind the growth in profits in 2003. Benefiting from continued expansion in mortgage and consumer finance areas, US bank profits maintained staggering growth rates, increasing by 23.8% to reach $153.7bn. This follows a 25.8% expansion to reach $124.1bn the previous year. US banks, with an aggregate of $153.7bn in profits, account for 36.8% of the Top 1000 total.
EU surge in profits
While this is less than the 49% achieved the previous year, the turnaround in Japan and improvements elsewhere, particularly the EU, have flattened the ratios. The 271 EU banks in the listing, for example, saw a surge in profits of more than 40% to reach $153.2bn, putting them on a par with US banks with 36.7% of the aggregate profits (down from 43% previously). In effect, the EU and US banks, which account for almost half the Top 1000, provide almost three-quarters of total profits.
The EU banks’ aggregate results have not been helped by the continued poor performance of the German banks. The 82 German banks in the listing produced an aggregate net loss of $306m.
Much of this combined loss stems from some of the big banks, for example, HypoVereinsbank (-$2710m), Commerzbank (-$2501m), Dresdner (-$3528m) and WestLB (-$2320) – but profits at many of the Sparkassen (savings banks) have also been weak. Like the effect of Japan’s banks on the Japanese economy over the past decade, the recent performance of the German banks has become a drain, rather than a driver, of the German economy.
In terms of profitability, US banks continue to dominate. In this listing the US banks show a remarkable average return on capital of 29.3%, well ahead of their 23.2% return the previous year, and almost double the return on capital of the EU banks, at 15.6%. While Latin banks perform well, with an aggregate return of 23.9%, the US banks are clearly the most profitable, with Asian banks (12.1%) and Japanese banks (5.2%) running far behind.
Profits and consolidation
The growth in overall profits has lifted the aggregate return on capital for the Top 1000 to a high 17.6%, just below the peak return of 17.9% in our 2001 listing. Aggregate return on assets reached a strong 0.8% (again just below the peak of 0.84% in our 2001 list).
Besides profits, consolidation provides another key theme in this year’s list. While the megamergers of Bank of America/FleetBoston and JP Morgan Chase/Bank One will not show up until next year’s list, a steady stream of smaller mergers and acquisitions across the globe has continued as bankers acknowledge the advantages of size.
Although European cross-border mergers are currently seen as too political and complex, markets are rationalising in Europe and elsewhere, and this trend for consolidation can be seen in the larger size of the banks in the Top 1000. Not only has the aggregate Tier One capital of the listing soared by a stunning 20.45% to reach a record $2377.3bn but the size of the smallest bank in the Top 1000 has increased dramatically.
Banks are getting bigger: in this year’s list the smallest bank has a Tier One capital of $172m compared with $153m the previous year, a significant rise. And, not surprisingly, aggregate total assets also rose significantly, by 19.3% to $52,391bn, indicating the growth in banking assets in this new expansionary phase.
Emergence of titans
Also, the continued consolidation of the largest banks, says Boston Consulting Group in a recent report, is heralding a new era: the age of the banking titans. After the megamergers mentioned above, there are now, with Citigroup and HSBC, four banking titans. “We expect the banking titans, by their presence alone, to exert influence on the strategy of other global players. Focusing on operations that are subscale compared with the titans and following slow organic growth strategies are unlikely to guarantee independence anymore. A new challenge for top management is to survive successfully in the age of banking titans,” the report says.
Examining the Top 1000, it comes as no surprise that Citigroup, with a Tier One capital of $66.9bn, tops our listing for the sixth year in a row. The US global giant is not just big, it also managed to post pre-tax profits of $26.3bn in 2003, up 15.6%, and produce a return on average capital of 41.8%, better than any of its Top 25 competitors.
While the remaining so-called titans continue to hold top places, France’s Crédit Agricole Groupe jumps from fifth to second place following its acquisition of Crédit Lyonnais. However, Crédit Agricole’s return on capital, at 15.1%, is well below that of the titans. The top 10 banks this year remain the same – with minor placing adjustments – but Royal Bank of Scotland should move up next year following its recent $10.4bn acquisition of Charter One in the US.
Among the Top 25 (by Tier One capital), the Dutch Rabobank is the big mover, climbing nine places to 15th, while China Construction Bank jumps from 37th to 21st place to head the Chinese big banks. Bank of China slips to 20th from 15th previously and Germany’s HypoVereinsbank, following heavy losses, drops to 32nd from 20th in last year’s listing.
Giants take biggest slice of pie
The Top 25 represent the biggest banks in the world and, following the consolidation trend, these giants are taking an increasingly large slice of the overall banking pie. This year’s listing shows that the Top 25 continue to expand and account for 37.06% of the aggregate total assets of the Top 1000 (see chart on page 174), a significant increase on the 31.08% in the 1995 listing.
With regards to bank assets, Japan’s Mizuho Financial Group claims top spot with total assets of $1285.5bn, edging out Citigroup with $1264bn and Switzerland’s UBS. Six banks (Mizuho, Citigroup, UBS, Crédit Agricole, HSBC and Deutsche) reported total assets in excess of $1000bn.
From a market capitalisation perspective, the Top 25 looks a little different although Citigroup still heads this list with a market cap in mid-June 2004 of $243.5bn. US banks are well placed with eight banks in the Top 25 followed by the UK (5), France (3) and Japan (3).
Looking across the regions in the latest listing, the EU banks account for 41% of the total Tier One capital, 48% of the total assets and 36.7% of the profits. The US banks, however, show their overall efficiency and productivity: with 22% of the Tier One capital and only 15% of the total assets, they manage to produce 36.8% of the profits, just ahead of the EU banks. Asian banks (excluding Japan), by comparison, account for 12% of Tier One, 11% of assets and 8% of overall profits – a reasonable performance but the relatively small size of the Asian banks shows in relation to the other regions. Nevertheless, the Asian banks – which have broadly the same amount of Tier One capital as the Japanese banks – produce aggregate profits of $33.2bn, well over twice that of the Japanese banks.
The Middle East banks remain relatively small but their profitability is improving. In the latest listing the 84 Middle East banks (including Israel) account for 2.7% of Tier One capital, 1.7% of total assets and provide 2.5% of aggregate profits, with profits from the region reaching $10.4bn.
The new entrants
This year’s Top 1000 contains 60 new entrants, slightly more than last year’s 55 arrivals. While some of these are a result of technical changes and restructurings, others represent rapid expansion (such as NIKoil IBG Bank coming in at 834) and recovery (such as Bank Rakyat Indonesia at 390).
Greater readiness to disclose results brings in a number of banks, including the two Brazilian savings banks, Caixa Economica Federal (217) and Nossa Caixa (506), as well as Beijing City Commercial Bank (515). The highest new entrant is Germany’s Eurohypo at 71, a new bank created from the merger of the mortgage banking subsidiaries of three German banks. The US provides 10 of the new entrants, led by Merrill Lynch Bank USA at 112, followed by Germany with six entrants, led by Landesbank Sachsen Girozentrale (280), and Denmark with four, led by Fionia Bank (947).
Also, 42 banks improved their ranking by more than 100 places. Iceland’s Kaupthing Bunadarbanki move up 452 places to 459, following a major merger in Iceland in May 2003. The new bank has recently bought Denmark’s FIH Bank. Turkey’s VakifBank moves up 400 places to 412. The big movers come from 23 different countries, the US providing the most with five major movers led by First Niagara Financial Group, which rises 279 places to 637.
Changes among winners
In our Winners listing, some significant changes have taken place. In Tier One capital, Citigroup retains the lead but Crédit Agricole edges out HSBC in western Europe, China Construction Bank knocks Bank of China off the top spot in Asia, Banco Bradesco edges out its rival Banco Itaú in Latin America, and Bank Hapoalim replaces Bank Leumi at the top in the Middle East.
In the total assets race, Mizuho reclaims its crown from Citigroup while, in terms of return on capital, American Express Centurion Bank achieved a stunning rate of return of 81.47%, well above the 62.63% by India’s Andhra Bank. As regards regional winners, the place for best profit on capital in western Europe goes to Türkiye Halk Bankasi (59.6%), in central Europe to Hungary’s National Savings & Commercial Bank (50.1%), in Latin America to Brazil’s Banrisul (60.9%), in the Middle East to Libyan Arab Foreign Bank (49.8%), and in Africa to First Bank of Nigeria (56.6%).
So, after the bumper results of 2003, what is the outlook for banks this year? Early year results in the US suggest that the mild economic recovery will help to deliver yet another bonanza for US banks in 2004. While banks in Japan and Germany still need to show significant improvements, elsewhere the consumer finance boom continues to provide optimism and the prospects of further increases in bank profits.
Although the 65.4% profit growth recorded in this year’s Top 1000 looks as if it may be difficult to repeat, the economic environment and strengthening banking conditions suggest another strong performance.
