Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

Top 1000 World Banks - Africa stars as risk-weighted assets rise across the board

Despite policy-makers’ efforts to de-risk the industry, banks' risk-weighted assets are on an upwards trajectory, with Africa jumping the highest in the 2018 rankings. Danielle Myles reports.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

There are many ways to measure the robustness of a bank’s balance sheet. One is The Banker’s capital-to-asset ratio (CAR), which is similar to Basel’s leverage ratio but excludes off-balance-sheet items. The global aggregate CAR rose 16 basis points in the 2018 rankings, which shows that banks grew capital faster than assets, and that the industry de-levered, throughout 2017.

However, analysing the industry’s risk-weighted assets (RWAs) paints a slightly different picture. The Top 1000’s combined RWAs amount to $59.9bn, up 17.7% from 12 months earlier. It is a sharp reversal from the past few years, when RWAs hovered around the $54bn mark before dipping to $50.9bn in 2017’s rankings. More importantly, RWA density – being RWAs divided by total assets – has jumped nearly four percentage points to 48.43%. Despite policy-makers’ efforts to de-risk the industry, asset portfolios contain more risk today than four years ago when the RWA density was 48.16%.

Every region’s RWA density has risen; some have undone the improvements they made 12 months earlier. China’s RWA density of 61.43% is exactly the same as in the 2016 rankings. Japan’s RWA density nudged up nearly four percentage points, but it is still far below the global average. The rest of the Asia-Pacific region saw a similar increase, creating an RWA density of 52.23%.

As with previous years, the only market with a lower RWA density than Japan is western Europe. In the 2018 rankings it posted the smallest increase in RWA density, suggesting the gap between it and other regions will continue to widen. Western Europe’s leadership in this area reflects its biggest banks’ efforts to cut RWAs, and in turn their capital requirements.

In stark contrast is the world’s other most advanced banking market, North America. Its RWA density of 59.72% is more than 26 percentage points higher than western Europe’s. Two US lenders, Simmons First National Corp and Pacific Premier Bancorp, posted the third and fourth largest rises in RWAs in this year’s rankings, respectively.

Latin America and the Caribbean’s RWA density is growing faster than their northern neighbour, but it still hovers around the global average. Alongside China, it is the only market where total assets and RWAs declined in 2017.

By every measure, Africa’s asset base recorded the biggest increase in risk. In the 2018 rankings, the continent’s collective RWA jumped 68.9% and its RWA density nearly 13 percentage points. But in absolute terms the increase is small, given the sector’s asset base is a fraction of those in other regions.

Central and eastern Europe still holds the dubious honour of having the world’s highest RWA density, which is now 78.07% and shows no signs of slowing down. The ratio swelled nearly 10 percentage points, second only to Africa. Russia appears to be a major contributor; three of its banks have among the six highest RWA densities in the 2018 rankings.

In the Middle East, RWAs grew more than total assets, seeing its RWA density hit 67.33%. The worst offenders were two Bahrain-based investment banks: GFH Financial Group, which has the world’s highest RWA density of 204.1%, and First Energy Bank, where the figure is 136.3%. They are moving in opposite directions, though. GFH nearly doubled its RWAs in 2017 while First Energy Bank cut its by more than half.

Fears that RWAs would materially rise due to the Basel Committee’s refinement of RWA calculations – dubbed Basel IV – subsided in December 2017 when it released a watered down set of rules. From 2022, banks that use internal models will be subject to an output floor. But the standardised approach, on which the output floor is based, has been revised to permit different weights for mortgages depending on their loan-to-value ratio. These concessions make Basel IV less burdensome than many had expected.

Risk-weighted assets - regional breakdown

World Region Total Assets ($bn) Risk-Weighted Assets ($bn) Current RWA to TA ratio (%) Previous RWA to TA ratio (%) Basis points difference
Africa 941 478 50.72 37.76 1,296
Asia-Pacific ( ex China and Japan) 12,841 6,707 52.23 48.97 326
Central and Eastern Europe 1,415 1,104 78.07 68.55 952
China 29,019 17,828 61.43 56.34 509
Western Europe 40,236 13,533 33.63 31.90 173
Japan 13,485 4,863 36.07 32.14 393
Middle East 2,842 1,914 67.33 58.65 868
North America 20,279 12,111 59.72 56.79 293
Latin America and Caribbean 2,595 1,342 51.73 45.17 656
TOTAL 123,653 59,880 48.43 44.84 359

Was this article helpful?

Thank you for your feedback!