Stephen Timewell considers the state of the global banking industry as it tries to survive the US economic downturn.Research: Terry Baker-Self, Alice Partridge & Cecilia Araujo

A year ago the financial services revolution was beginning to look a little ragged. The dotcom bubble had just burst and thoughts that high growth may not continue were only starting to be whispered. Banks were focused on coping with globalisation, restructuring and mergers and incorporating the internet and new technologies into their strategies, but a clear conflict between expectations and reality was emerging. Towards the end of 2000 the bullishness that marked the first half of the year had been reversed as the dynamic US economy began to stumble and the internet began to lose its gloss.

This downward trend has continued but while consolidation and profit growth for our Top 1000 banks still remain critical, results for most in 2000 did not quite reach earlier expectations as the economic slowdown began to kick in. In aggregate the pre-tax profits of the Top 1000 reached $317bn, marginally above the 1999 total of $310bn - a satisfactory performance but likely to be a difficult one to repeat in the new economic environment.

Although aggregate profits were stable the Top 1000 listings were anything but as the merger process brought in new names and rewrote the top listings. For the third year running Citigroup held its position as the world's largest bank by Tier One capital, showing a 14.3% increase to reach $54.5bn. But coming not far behind is the new Japanese conglomerate, Mizuho Financial Group. Formed through the merger of three large institutions (Fuji Bank , Dai-Ichi Kangyo Bank and Industrial Bank of Japan), Mizuho was born as the world's second largest bank with Tier One capital of $50.5bn. And together Citigroup and Mizuho account for a staggering 5.9% of the Top 1000 aggregate capital.

Mizuho's high entrance pushed Bank of America into third place and the new combination JP Morgan Chase & Co came in fourth with $37.6bn pushing past HSBC Holdings which showed a 31.4% increase to reach $34.6bn.

The big changes in the world's Top 25 come from the Japanese. As a result of mergers, such as Mizuho, the number of Japanese institutions has dropped from nine last year to five in this year's list. And further consolidation is likely to affect next year's list as the merger (on April 2 2001) of Sanwa Bank, Tokai Bank and Toyo Trust into UFJ Holdings comes through and Sakura Bank and Sumitomo Bank merge to form Sumitomo Mitsui Banking. The Japanese may only have four institutions in the Top 25 next year but these much bigger outfits are all expected to be in the Top 10 - what they lose in numbers they make up for in combined capital.

US & European heavyweights

Elsewhere, the US banks strengthened their role with six banks, led by Citigroup, in the Top 25 followed by the UK and China with three and France, Germany, the Netherlands and Switzerland with two each. All these heavyweights together have a combined Tier One capital of $585.4bn which represents 33.1% of the Top 1000 aggregate. This percentage has moved up from 30.4% last year showing the increasing role of the big banks.

In terms of assets, Mizuho has made an unprecedented entrance, coming in to the top slot with a massive assets total of $1259.5bn, over $350bn ahead of its nearest rival Citigroup on $902.2bn and Deutsche Bank, last year's leading bank, on $874.7bn. As mergers continue the bigger banks are not only getting significantly bigger (Mizuho's leading asset total is over $400bn higher than Deutsche's leading total last year) but they are also an increasingly dominant part of the global banking community. The top 25 this year accounts for 38.7% of the Top 1000 asset aggregate which is a significant jump up from the 32.8% figure last year and the average through the 1990s of around 30%.

Profits up

Looking at profits, Citigroup again produced the highest pre-tax profits at $21.1bn, a 32.6% increase over the previous year. Among the big banks there were some winners with Wells Fargo up 83% to $10.9bn and also some losers with Bank of Tokyo-Mitsubishi, Bank One Corp and Sanwa Bank posting losses of $870m, $1080m and $1449m respectively. Despite some losses the Top 25 nevertheless produced an aggregate profit total of $118.1bn, which accounts for 37.3% of the Top 1000 aggregate total of $317bn. Also banks from the US and EU countries again dominate the overall profits perspective with both groups accounting for 74% of the total this year compared to 73% last year.

As regards market capitalisation Citigroup again stands head and shoulders above the rest at $255.2bn (on June 15, 2001), well over double the valuation placed on its nearest rival, HSBC Holdings, on $112.4bn. US institutions take four of the top five slots with Wells Fargo showing the biggest improvement coming in at number five with $74.6bn. Mizuho, however, comes well down the market cap list at $37.8bn.

Is the downturn over?

What is the outlook for the future? While economists claimed that the US downturn would be short-lived and analysts have remained optimistic, this year so far has produced declining markets, lower volumes and the perception of considerably worse to come. The president of the Bank for International Settlements (BIS), Urban BŠckstršm, said in Basel in June: "The salient economic development in the most recent period has been the deceleration in global growth. This started with an unexpectedly abrupt and sharp slowdown in the US economy in the latter part of 2000, possibly heralding an end to, or a pause in, an extraordinary period of expansion. It was accompanied by a faltering of the economy in Japan, and followed by a weakening of growth in emerging market countries and subsequently, to a lesser degree, in Europe."

In short, the slowdown in the global economy's prime engine, the US, has been transported around the world. Credit Suisse First Boston's Mary Davis notes: "The collapse in US import demand growth from 24.6% a year ago to just 2% year on year in March 2001 is depressing growth in all emerging market economies. Asia's tech woes continue with no sign of a recovery in US orders, while the slumping Japanese economy offers no relief." In mid-June CSFB again revised downwards its global GDP forecasts: "For the euro area we now expect 2001 GDP growth of 1.9% (was 2.3%) and 2.3% in 2002 (was 2.4%), for Japan, we envisage -0.4% in 2001 (was 0.6%) while our US outlook is unchanged at 2.2% this year and 3.4% next."

But while analysts maintain cautious optimism about the US and claim that the key indicator - US consumer spending - is holding up, considerable uncertainties remain both in the US and elsewhere. Will the 250 basis point ease by the US Federal Reserve this year work? Will George W. Bush's tax cuts help keep US consumer spending from collapsing? Can Japan's new prime minister steer the economy out of the financial crisis it faces?

Key concerns

In trying to assess how bad the current situation is and how long it will last, the key difference between this and other recent downturns is that the US is in decline and the world's second largest economy, Japan, is in much worse shape and both are happening at the same time. When you throw in concerns about Argentina, Turkey and Brazil (see page 76) and worries over the euro, the uncertainties facing the financial world are significant. Comparing this and previous downturns, Morgan Stanley Dean Witter global economist Steve Roach concludes: "The new global contagion may end up being far more lethal than that which almost brought the global economy to its knees in late 1998."

This may not be a happy prospect but the outlook for banks may not be so bad. The BIS' Mr BŠckstršm notes: "With the exception of Japan, the banking sector generally appears to be in better shape than before previous downturns. Encouraged by supervisors and scarred by previous experience, financial institutions have tightened risk management practices. And emerging market countries have taken steps to address the vulnerabilities revealed by the Asian crisis, especially with regard to their external debts."


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