HIGHLIGHTS:
The aggregate return on Tier 1 capital of all the banks in the 2005 Top 1000 listing reached a record return of 19.86%, significantly higher than the previous year’s 17.56%.
- The UK and US are the most profitable banking sectors among the world’s major economies, each achieving a 26.3% return on Tier 1 capital.
- The 294 banks from the EU25 account for 39.6% of the aggregate profits of the banks in the listing.
- The 197 US banks in the Top 1000 account for 27.9% of aggregate profits.
- The aggregate profitability of the 91 German banks is the worst of the main European economies, with a low 6.8% return on Tier 1 capital.
- The Top 25 banks account for 39.3% of total aggregate pre-tax profits.
- The Top Five banks account for 12.3% of aggregate Tier 1 capital and 10.4% of aggregate total assets.
- The aggregate return on total assets of the 2005 Top 1000 was 0.9% and the aggregate Tier 1 capital to total assets ratio was 4.53%.
Banks across the globe have not only achieved record levels of profits, yet again, but in fiscal 2004 they reached their highest levels ever of profitability by return on capital. In The Banker’s Top 1000 world banks listing for 2005, the overall level of profitability (pre-tax profits to Tier 1 capital) rose to a staggering 19.86%, well up on last year’s 17.56% and the previous record of 17.91% in the 2001 listing. The almost unthinkable return on capital of 20% – almost double that of the 1999 listing – reflects a variety of factors, including the relatively benign growth environment, improvements in weak banking sectors such as Germany and Japan, the expansion of retail banking worldwide and advances in technology.
Continuing the profit growth trend in which aggregate pre-tax profits jumped by 65.4% to $417.4bn last year, The Banker’s 2005 listing showed a further 30.3% growth in profits to reach a record high of $544.1bn. These global figures are all converted in US dollars and, therefore, reflect currency movements against the dollar. The two years of bumper bank profits contrast sharply with the down years of 2002 and 2003. These followed the collapse of the technology boom and the 2001 September 11 attacks and saw profits fall to 40% of current levels.
While concerns over US deficits and inflationary pressures, along with high oil prices and slow European growth, still cloud the outlook, new technologies appear to have given banks the tools to move from what analysts describe as a cottage industry to a truly industrial model. And further consolidation among banks is expected to further strengthen the efficiencies gained so far.
Decreasing US dominance
Unlike the previous two years, the profits story is less dominated by the US banks. The 197 US banks, down from 211, that are included in the 2005 listing still punch far above their weight – while the US banks account for 21.1% of aggregate Tier 1 capital, they are responsible for 27.9% of overall profits. This year, aggregate US pre-tax profits reached $151.5bn, slightly down on $153.7bn the previous year. This flattening reflects, in part, the reduced earnings in fiscal 2004 of big institutions, such as Citigroup, JPMorgan Chase and Washington Mutual. But US banks remain extremely profitable and the aggregate return on (Tier 1) capital of the 197 banks, although down, remains at a high 26.3%, well above the global average.
German recovery
Elsewhere, signs of recovery in the German and Japanese markets have helped boost global aggregates. The 82 German banks in last year’s listing produced a surprising aggregate net loss of $306m. This year’s listing shows that the 91 German banks included have returned to the black, producing an aggregate $14.2bn in profits. Only HypoVereinsbank continued to make big losses
(-$3.1bn) but last month it was bought by Italy’s UniCredit so it will no longer be included in the German list. The German banking sector, like its economy, faces stiff challenges and much more consolidation and restructuring are necessary if it is to be competitive globally. Although improved, the aggregate return on capital of the 91 German banks is a low 6.8%, the lowest in the EU, and German bank profits account for only 2.6% of the global total.
In Japan, the non-performing loans of the major banks had fallen to 1.2% in March 2005 and at long last the banking sector is on the road to sustainable recovery. Although two large banks, SMFG and UFJ, still posted large losses, the 106 Japanese banks in the listing posted aggregate profits of $32.4bn, more than double the $14.9bn of the previous year. While return on capital also more than doubled to 10.7%, and more is expected next year, the performance of Japanese banks is still well below global averages and, despite accounting for 13.2% of global assets, they provide a mere 6% of global profits.
European Union expansion
The expanded EU of 25 states (EU25) is the dominant grouping in the latest listing. Even though many of the banks of the 10 new EU states were already owned within the EU15, the number of banks in EU25 has risen to 294 within the Top 1000 and they now provide 43.1% of aggregate Tier 1 capital, 50.0% of total assets and 39.6% of total profits. With profits reaching $215.3bn, the EU25 is now the largest source of banking profits in the world, ahead of the US on $151.5bn, with 27.9% of the total.
EU25 profits have been helped by the modest German improvement and healthy growth by the large British, Swedish, Belgian, French and Spanish banks, bringing average profitability for the grouping up to 18.3%. Of the EU25, the most profitable country grouping is the 23 banks of the UK, which achieved a return on Tier 1 capital of 26.3%, the highest in the world among major economies and the same as that achieved by the 197 US banks in this listing.
Despite reduced economic growth, many of the banking sectors in EU countries performed well and the UK was followed closely by Sweden (24.4% return on capital), Belgium (20.5%), France (19.3%), Spain (19.1%), the Netherlands (17.6%), Italy (17.4%) and Austria (16.9%). These figures highlight the plight of the German banks at 6.8%.
In terms of raw size, the trends of increasing profits and profitability are also reflected in the continuing growth in Tier 1 capital and assets. Consolidation remains an important theme as the big banks get even bigger and the threshold for entry into the Top 1000 surges dramatically. This year’s listing shows that aggregate Tier 1 capital rose by 15.2% to reach a record $2739.5bn, this follows a 20.5% increase the previous year.
