Stephen Timewell finds silver linings hard to come by in a period characterised by profit devastation among some major playersResearch by Terry Baker-Self, Alice Partridge & Beata Ghavimi

The global economic slowdown hit hard in 2001 and the results of the bursting of the dotcom bubble the previous year, the decline in US and Japanese economies were felt in earnest by banks around the world.

Banks felt the pinch from sluggishness in the corporate sector and the low interest rate environment is changing the way banks will have to operate in the future.

The easy money has gone and the lower returns now forced on banks look likely to be maintained, making fundamentally new banking models essential. The change in relative corporate profitability is seen as a key theme not only for banks but for capital flows generally which will have an impact on asset prices across borders.

Speaking last month on the International Monetary Fund's latest Global Financial Stability Report (see page 18), author Gerd Häusler notes: "Corporate profitability has a bearing on banks and as discussed earlier this year the credit cycle has turned very unfavourable towards banks, and we may see ourselves now at the tail-end of a fairly harsh credit cycle.

"There has been quite a bit of strategic downsizing of the cost base of some banks and also a downsizing of balance sheets. And this has already impacted the lending of some banks, not least to emerging markets. And this trend will probably continue."

While last year's listing reflected the beginnings of the economic downturn the results from 2001 in this year's Top 1000 showed the full impact of a global banking sector in decline. While some bright spots existed in certain areas and retail banking regained prominence, aggregate pre-tax profits of the Top 1000 were devastated. Total profits fell by a whopping 29.7% to $222.8bn from $317bn the previous year. While the aggregate total did not fall as low as the $174.4bn in our 1999 listing (which reflected 1998 results and the Asian crisis) it represented a much sharper percentage decline than the 1998 Asian crisis which caused only a 14.9% decline.

Worse than four years ago

In profit terms it could be said that the current economic downturn has had twice the impact on banks as the 1998 global crisis.

A critical part of the huge drop in profits has been the massive losses posted by the new, large Japanese consortiums in the latest financial year ending 31 March. The four Japanese groups in the Top 25 declared losses of $32bn with the losses spread as follows: Mizuho Financial ($11.5bn), Sumitomo Mitsui ($4.9bn), Mitsubishi Tokyo Financial ($2.4bn), and UFJ Holding ($13.2bn).

The previous year the large Japanese banks had generally been in profit but this time round the predicaments facing the country's banking sector were more fully exposed and these losses are not expected to be the end of Japan's banking problems (see page 176). And it is interesting to note that of the 121 Japanese banks in the Top 1000, the total net losses of all the banks in the listing amounted to $50.1bn, including the new Resona Group's declared $9.5bn loss.

The consolidation and restructuring in Japan has also led to a significant change in the listing. Five years ago seven Japanese banks were in the world's Top 25 banks but this year the total has been reduced to just four with Mizuho (3rd), Sumitomo Mitsui (6th), Mitsubishi Tokyo (8th) and UFJ Holding (9th) providing a more concentrated presence among the leading banks. And these four are all among the world's Top 10.

Meanwhile, Citigroup leads the Top 1000 listing for the fourth year in a row, showing a 7.2% increase in Tier One capital to $58.4bn. Citigroup, in capital terms, is by far the largest bank in the world, having 39.2% more Tier One capital than its nearest rival, Bank of America Corp, with $42bn. Citigroup's size in the marketplace is huge and not only does it represent 15.9% of the total Tier One capital of the Top 25 but a staggering 3.2% of the Top 1000 total.

US dominance

Following Citigroup there are five other US banks in the Top 25, the same as last year, giving the US the biggest grouping. Japan and the UK follow with four, the UK's recent merger of the Bank of Scotland and Halifax to form HBOS entering the Top 25 in 19th place. The rest of the leading banks are rather evenly spread with China (3), and France, Germany and the Netherlands each with two banks.

The importance of the Top 25 continues to grow as they take a bigger share of the banking pie. This year the Tier One capital of the Top 25 amounts to $627.6bn, 34.3% of the Top 1000 total of $1.831 trillion. This compares with 30.4% two years ago and 33.1% last year and this trend is likely to continue as consolidation rumbles on worldwide and the bigger banks extend their networks.

The bigger they are, the harder they fell

The bigger banks appear to account for the lion's share of the losses suffered, especially by the large Japanese entities. Profits for the Top 25 were almost halved, falling from $118.1bn last year to $63.5bn this time around. As a percentage, the Top 25 account for only 28.5% of the Top 1000 profits compared with 37.3% last year and clearly the combined $32bn loss of Japan's big four is a major factor in this.

In asset terms, Mizuho again gains top slot with a mighty total of $1.178 trillion but Citigroup is catching up fast, showing 16.5% growth in 2001 to reach $1.051 trillion. While Deutsche Bank has slid to 4th place on $809bn the Top 25 retain their relative importance accounting for $14.631 trillion or 36.9% of the Top 1000 total of $39.628 trillion.

As regards market capitalisation, Citigroup again shows its dominance but also reflects changes in the market over the past year. In mid-June this year Citigroup's market capitalisation was put at $206.9bn, 19% down on the $255.2bn last year. Many of the other top banks saw their market capitalisations reduced by about 10% while Credit Suisse Group and FleetBoston Financial had a 25.8% and a 17% decline respectively. Royal Bank of Scotland, however, showed a sizeable 22.8% increase to move into 5th place on $77.4bn.

In other changes, this year's Top 1000 incorporates 79 new arrivals. While most of these represent new banks entering the listing, such as the seven new Russian banks, many others come as a result of mergers and acquisitions such as the new Japanese conglomerates. There are also some big movers within the listing with 41 banks moving by over 100 places or more. The biggest mover of the year is Iran's Bank of Industry and Mine which moved from 800th to 304th, 496 places.

Expectations for 2002

The much discussed global economic recovery appears to be happening but the resurgence, if any, is slow and the prospects for corporates are not bright. In the June Quarterly Review from the Bank for International Settlements, Philip Woodridge analysed the international banking situation, noting: "In the fourth quarter of 2001, the global economic slowdown continued to depress activity in the international banking market.

"The growth rate of cross-border bank credit slowed further to 8% year over year in the fourth quarter, down from a peak of 14% in the first. Inter-office transfers and increased purchases of US securities supported activity in the dollar market.

"However, activity in the euro and yen markets remained weak. Indeed, in Europe, subdued corporate demand for bank credit and efforts by firms to reduce their reliance on short-term debt resulted in the first quarterly contraction in cross-border euro claims since European monetary union."

While the overall banking scenario continues to be downbeat, Mr Woodridge adds a few positive notes perhaps for emerging economies: "Cross-border bank claims on emerging economies continued to contract, down by $2bn in the fourth quarter and by 2% from their level a year ago. More noteworthy, however, was the sharp drop in banks' liabilities to emerging economies. After depositing $249bn with banks in the reporting area between mid-1999 and mid-2001, residents of of emerging economies withdrew $42bn from those same banks in the second half of 2001. This resulted in substantial flows from banks in the reporting area to emerging economies for the first time in nearly three years."

Analysts suggest that recovery may be some time in coming and with corporate profitability in many areas uncertain the outlook for banks is far from exciting. And given continuing worries over the Japanese banking sector and weak US economic growth, 2002 is not expected to show vastly improved performance.


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