The Top 1000 world banks have again broken all records. This year’s listing shows record pre-tax profits of $544.1bn and a record return on capital of 19.9%. After profits grew by 65.4% in last year’s survey, they increased by a further 30.3% in the 2005 listing. Are they on a continuous upward path?
The 2002 listing showed that banking profits could collapse. Following the bursting of the tech bubble, they dropped by almost 30% to $222.8bn but now they stand at two-and-a-half times that level.
Will they continue to grow? The Bank of England’s latest financial stability review at the end of June said the outlook for the major macroeconomic factors influencing credit risk is broadly benign. Longer-term interest rates, such as 10-year government bond yields, in the UK, US and eurozone are said to be lower now than six months ago. Twelve-month global corporate default rates, which were already at less than 1% at the end of 2004, have declined further since then.
Sceptics raise concerns
Sceptics are wary, particularly in the US, that the benign environment cannot last and that profits have peaked. A combination of increasing default rates, high oil prices and global imbalances are expected to have a negative impact on profits. But evidence suggests these concerns are outweighed by technological efficiencies, expanding markets – particularly in retail – and the further recovery in Japan.
What is certain, however, is that the 491 banks from the EU25 and the US in the Top 1000 listing account for almost exactly two thirds of the capital, assets and profits of the world’s top banks. Also, the top five banks, or titans, are getting larger and more dominant and now account for 14.6% of Top 1000 profits.
While overall bank profits are likely to remain variable over time, the structural trends, such as EU25 banks now accounting for 50% of total assets, are not likely to be reversed. Just as the entry point into the Top 1000 has jumped to $200m this year, the big players will continue to get bigger and the titans’ continued advance will be inevitable. The EU25 may be in decline in manufacturing but it is forging ahead in financial services.
