The return on aggregate total assets of the Top 1000 reached 0.9%, up from 0.8% the previous year. And the ratio of Tier 1 capital to aggregate total assets was 4.53%, down slightly on the 4.54% achieved the previous year.
The key lesson of these growth figures is that banks are not standing still. The two US giants, JPMorgan Chase and Bank of America, reflect the integration of their respective large acquisitions, Bank One and Fleet Boston. Spain’s Santander Central Hispano moves up the ranks following its purchase of the UK’s Abbey. Next year, UniCredit’s recent acquisition of Germany’s Hypovereinsbank is likely to propel it into the world’s top 10 and this may be the start of the long awaited surge in European cross-border mergers (for the counter view, see this month’s editorials).
The latest listing suggests that, as banks get bigger, a group of super-banks or banking titans is emerging. Based on Tier 1 capital, the five biggest banks in the world (Citigroup, JPMorgan Chase, HSBC, Bank of America and Crédit Agricole) are moving themselves on to a higher plain. All five have Tier 1 capital of over $63bn and have put a distance of $20bn between them and their nearest competitor, Royal Bank of Scotland, in sixth place. The proposed merger between Japan’s Mitsubishi Tokyo Financial Group and UFJ Holdings is expected to create a sixth titan with capital in excess of $60bn. How these titans use their market muscle remains to be seen but these banks are clearly creating a separate strata of their own and look set to take over growing segments of the global banking market.
Big players increase their market share
By themselves, the five titans have a combined Tier 1 capital of $338bn or 12.3% of the Top 1000. They also have $6272bn in combined assets, or 10.4% of the Top 1000, and these figures are expected to expand further.
The titans and the other big banks continue to increase their market share as the economies of scale take hold. The Top 25 banks now account for a growing proportion of the key indicators and, in this Top 1000 listing, the Top 25 banks provide 35.0% of aggregate Tier 1 capital, 38.6% of aggregate total assets and 39.3% of aggregate profits. Both the capital and asset share have moved up from 33.7% and 37% respectively in the previous year but the Top 25’s share of global profits has slipped slightly from its record 42.1% in the 2004 listing.
The smaller banks have also expanded significantly. Entry into the 2004 Top 1000 required a Tier 1 capital of at least $172m but the entry point for the 2005 listing has shot up dramatically by 16.3% to $200m. No bank, large or small, can afford to stand still.
Taking a closer look at the Top 1000, Citigroup, with a Tier 1 capital of $74.4bn, tops our global listing for the seventh year in a row. The US giant is also the bank with the largest pre-tax profits in the world at $24.2bn. Unlike the previous year, Citigroup was ousted from the top spot in terms of profitability in the Top 25 but still achieved a very acceptable 34.2% return and again headed our market capitalisation listing at $248bn on 15 June.
Apart from Citigroup, in our Winners listing, Bank of China replaces China Construction Bank at the top of the Asia Tier 1 capital listing and Switzerland’s UBS moves to the top of the assets listing with $1533bn, replacing Japan’s Mizuho Financial Group.
South Africa’s Standard Bank Group and Russia’s Sberbank remain at the top of both the Tier 1 capital and total assets sections of their respective regions of Africa and central and eastern Europe.
Impressive returns on capital
In the return on capital winners sector, the specialist American Express Centurion Bank again topped the Top 1000 listing with a staggering return of 117%. This was followed by winners in the following regions: Japan, Biwako Bank (101.3%); Middle East, Bank Melli Iran (80.7%); central and eastern Europe, Russian Standard Bank (76.1%); Latin America, Bancolombia (72.4%); western Europe, TC Ziraat Bankasi (61.5%); and Asia, Bank Rakyat Indonesia (58.4%).
Inside the Top 25, JPMorgan Chase has pushed Crédit Agricole out of second place and the UK’s HBOS has moved to ninth place, pushing Sumitomo Mitsui Financial group to 15th. The other big move was Deutsche Bank’s slip from 12th to 21st following a 13.4% decline in Tier 1 capital.
This year’s Top 1000 contains 60 new entrants, the same as the previous year. While some are the result of technical changes and restructures, John Hancock Holdings (Delaware) came in at 84 as a result of changing regulatory jurisdiction, while Hypo Real Estate Holding entered at 106 thanks to a spin-off from the HVB Group. Four more Iranian banks entered the list this year, along with three Islamic banks – Qatar Islamic Bank, International Banking Corporation and Shamil Bank of Bahrain.
Dramatic improvements
In addition, 56 banks improved their ranking by more than 100 places. The three Icelandic banks are in this group, led by the acquisitive Kaupthing Bunadarbanki, which moved up 248 places to 211. At the top end, Bank of China moved up from 29 to 11 following a large capital injection, making it the largest bank in Asia (excluding Japan).
Looking ahead, can the bumper years continue and the profit growth be maintained in 2005 or are banks heading for a downturn? The overall profit growth of 30.3% in this listing and the 65.4% growth the previous year are hard acts to follow but first-quarter results this year give no indication of an imminent slowdown. And analysts in Japan are confident that the recovery will continue and results for the current fiscal year will be the highest in nearly two decades.
In contrast, analysts in Europe suggest the sector’s earnings growth over the past few years has come from declining bad debts and that these ‘tailwinds’ of the past could become the ‘headwinds’ of the future. On a similar negative tack, this month’s Bracken column argues that the current high level of US bank profits is unlikely to be sustained whether the US economy grows or slows.
While there is little doubt that the global economy faces increasing uncertainties, there are opportunities in many areas especially in the unexplored retail, mortgage and consumer sectors. With the efficient use of new technologies, banks are developing new markets and new customers and the banking cycle is becoming less tied to the economic cycle and more able to motor on regardless.
