No sign yet of calling time on the banking sector’s profits bonanza
Our listing shows that globalisation has boosted the banking sector and the three years of record gains can certainly be extended.
The Top 1000 world banks have managed to produce record profits and growth for the third successive year. But can the banking bonanza continue? The Banker’s 2006 world banks listing shows record aggregate pre-tax profits of $645.1bn and a record return on capital of 22.7%. Banks have never been more profitable. But has the sector peaked and is a crash imminent? After all, it is only four years since the tech bubble collapse sent aggregate profits into a tailspin to $222.8bn and return on capital slumped to 12.3%.
Can banks avoid the boom and bust cycle and keep the party going? The latest Top 1000 listing clearly indicates a significant slowing of all key growth indicators with profits up a healthy 18.6% but still well down on the 30.3% and 65.4% growth of previous years. Slower growth from a higher base is inevitable but are banks heading for a decline? Pessimists have been predicting doom for ages but fears of macroeconomic imbalances, US deficits and rising interest rates have, as yet, failed to stop the onward march of the banks.
Volatility smoothing
The increased cost of regulation and improved risk management have impacted on banks, as have greater global political complexities, but none of these factors have knocked banks significantly off course. Although corrections are possible, as was seen four years ago, optimists can argue that the global banking environment has been structurally altered, a retail banking revolution is taking place and new opportunities on a global scale are smoothing out the ups and downs of the banking cycle.
Going forward, the 483 banks from the EU25 and the US, which account for 64.4% and 63.9% of the Top 1000’s assets and profits respectively, face challenges but also huge growth potential. Cross-border investment barriers are crumbling, the political and regulatory obstacles to European cross-border banking are falling (as BNP Paribas’ recent acquisition of Italy’s BNL shows), and the massive growth of retail banking in countries such as Brazil, Russia, India and China, among others, brings huge advantages to both international and domestic players.
Globalisation has genuinely hit the banking sector and with new markets and technologies improving the outlook, the past three years of record performances can definitely be extended.
