The Banker Top 1000 shows that the Japanese banks seem to have finally turned the corner and that, despite dominating the listings, EU banks are suffering from the lack of profitability of German banks.

The wealth of information in this year’s Top 1000 demonstrates admirably that the world’s top banks not only produced bumper profits – a record $417.5bn, up 65.4% on the previous year – but they are now on a firmer structural footing that lays the groundwork for further growth.

After heavy losses the previous year, Japan’s banks have this year produced almost $15bn in aggregate net profits and now finally appear set to emerge from the doldrums of the last decade. This, however, cannot be said for the 82 German banks in the listing whose aggregate net loss of $306m shows the huge losses sustained by most of the big banks (Deutsche excluded) and the poor profitability of the rest. Germany’s weak banking performance and unwillingness to reform its overbanked financial structure threatens not only its economy but its role as a key driver within the expanded EU. If German banks could get their act together rather than make losses of $300m then Germany and EU banking would be greatly enhanced.

The listing also emphasises the dominant position of the EU and US-owned banks. With Japan coming back into profits, a more normal global breakdown is apparent, but the core facts remain that in this listing banks from the EU (271) and US (211) account for almost half the Top 1000 world banks and together account for almost 75% of their profits. With the EU having recently expanded to 25 countries the structure will become even more skewed towards the two blocs in the future.

Also, Asian-owned banks may account for 152 banks in the Top 1000 but their aggregate Tier One capital is only 11.5% of the total and aggregate profits only 7.9%. The 84 Middle East banks and the 40 Latin banks fare even worse accounting for 2.7% and 1.5% respectively of combined Tier One capital and 2.5% and 2% of global profits.

The profitability of the banks also shows some deep divisions. The US banks show a remarkable average return on capital of 29.3%, almost double that of the EU average of 15.6%, indicating clearly that US banks are leading the way in providing strong, profitable institutions.

While the global average return on capital of the Top 1000 has risen to a high 17.6% – and the trend suggests that this good performance will continue – it is not a time for complacency. Much of this figure has been bolstered by the efficiency and productivity of the US banks. The EU banks, weighed down by the German banks, are far less profitable than the US players and this is the case in many areas, although the Latins and the central Europeans have produced healthy returns of 23.9% and 21% respectively.

The key for the future seems to be that banks around the globe are introducing more technology, are developing more focused products and are expanding into previously unexplored areas of retail and consumer finance. This augers well and creates a more profitable platform for future growth. It also, along with increasing competitive and regulatory pressures, helps force poorer performers into mergers and further consolidation.

The Top 1000 further highlights the global trend towards consolidation. Amongst the smaller banks, the fact that the Tier One capital of the smallest bank in the listing rose to $172m, $19m above last year’s smallest of $153m, indicates how quickly banks are getting bigger. In our 2000 listing, the smallest bank had capital of $138m.

And at the top end, the big just keep getting bigger. The aggregate total assets of the Top 25 banks in the listing account for 37.1% of the total of the Top 1000, well up from the 31.1% of the total they represented in our 1994 listing. And perhaps somewhat alarming, the capital of the world’s biggest bank, Citigroup, at $66.9bn is slightly larger than the aggregate capital of all 84 Middle East banks in the listing and Citigroup’s profits at $26.3bn are two and a half times bigger than all the Middle East bank profits combined.

There is a big gulf between the big and the small banks and that gulf is widening. But there is room for efficient, profitable institutions and they can come in a variety of sizes. The US banks, big and small, have shown what can be done, many of the rest, especially the Japanese and Germans, still have a long way to go.

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