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Top 1000 World Banks 2015: A new global picture

Greece aside, European banks have sustained a recovery in their performance in the 2015 ranking. But the willingness of the largest European players to act as global banks is clearly declining and emerging market champions are not quite ready to assume the cross-border mantle just yet.
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Top 1000 World Banks 2015: A new global picture

The aggregate capital-to-assets ratio for the Top 1000 world banks crossed the 6% threshold for the first time in this year’s ranking, as the trend for banks to boost their capitalisation continues. At first sight, the global banking landscape is also normalising. In particular, the recovery continues in Europe, notwithstanding the €9.5bn capital shortfall identified by the European Banking Authority in its 2014 comprehensive assessment. Western Europe’s share of global profits is still far below its pre-crisis peak, but it jumped to 14.2% in the 2015 ranking from 11.1% the year before.

At the same time, Asia-Pacific’s outsized share of profits shrank a little, but is still just over 50% of global pre-tax profits. The real drama this year is in eastern Europe, where conflict in Ukraine, sanctions on Russia and widespread currency depreciation have taken the share of global profits to just 1%, from 2.6% the year before.

However, not all is as it seems in Europe. The return to profitability is partly – perhaps even substantially – being achieved by shrinking balance sheets and geographical footprints. Last year, the eurozone remained the largest single banking market by Tier 1 capital. This year, it has been overtaken by both China – moving into the top spot for the first time – and the US. And while eurozone profits more than doubled to $60bn, overtaking both Japan and Latin America in the process, assets fell sharply by about 8%.

Only Japan also saw asset shrinkage, but there the currency depreciation played a larger role, because all our figures are converted into US dollars to compile a comparable ranking. The yen fell by more than 17.3% in 2014, compared with a decline of 13.7% in the euro. We take a closer look at the impact of exchange rate volatility on this year’s ranking later in this introduction. The headline effect is that, for the first time since the 2011 ranking, the Tier 1 capital threshold to enter the Top 1000 has fallen, to $382m from $391m last year.

Falling headcounts

Alongside the declining balance sheet, western European banks have also slashed headcounts in many cases. The largest US restructuring stories – Bank of America and Citigroup – have followed suit, with the two heaviest cuts in staff numbers from 2011 to 2014. The UK’s Royal Bank of Scotland, another bank that is still completing a major adjustment after a government bail-out, shows the highest percentage fall in staff. The Netherlands was also heavily affected. While ING required government support, the decline in numbers at Rabobank, which remained comparatively resilient during the crisis, is striking.

Meanwhile, HSBC announced in June 2015 that it would make staff cuts of up to 50,000 to improve its return on equity. This follows cuts of more than 22,000 since 2011, but it is telling that the existing cuts represented less than 8% of a very large total workforce.

Top 1000 World Banks – Tier 1 capital to assets ratio

At the other end of the scale, emerging market banks have been increasing their headcount significantly. Chinese banking growth includes staff as well as balance sheet, accounting for eight of the 10 largest increases in staff numbers from 2011 to 2014. The largest Chinese banks record headcount percentage increases into double digits over the period, while second-tier banks have grown staff numbers by between 30% and more than 60%. For the most part, these staff rises have been matched by dramatic increases in asset size and profits during the same period. But if the Chinese banking market slows, it is clear that the rise in headcount will not be sustainable.

The largest rise in staff numbers for any bank may already be unsustainable. Russia’s number one lender, Sberbank, tops the table with a rise in staff of 63,413. As the economic situation has deteriorated, profits have fallen – by half in 2014. This is partly the product of the exchange rate sell-off, but return on capital was also down seven percentage points at the bank, to a still-healthy 18.6%. If non-performing assets rise in Russia during 2015, Sberbank will clearly need to curb its hiring.

Strong subsidiaries

Meanwhile, the only Western bank in the top 10 for staff growth is Canada’s Scotiabank. The bank was resilient during the financial crisis and picked up subsidiaries cheaply across Latin America and the Caribbean to grow its network. In total, it has 23 foreign-owned subsidiaries listed in The Banker Database, but only six of these are large enough to feature in the country rankings for the Top 1000.

By far the largest network of foreign-owned subsidiaries within the Top 1000 is HSBC, with 18. Indeed, based on the numbers in our rankings, the case for HSBC to consider relocating its headquarters to Hong Kong seems strong. Its Hong Kong foreign subsidiary is by far the most profitable in the Top 1000 and a second Hong Kong bank, Hang Seng, comes in at number eight. The network of foreign subsidiaries earned $3bn more than the group as a whole, as calculated by the pre-tax profits for the bank holding company HSBC Holdings.

Top 1000 World Banks – Global share of banking profits

All but two of the top 10 most profitable foreign networks are owned by European banks. The exceptions are Citigroup in the US, and Bank of China, whose performance is mainly driven by its closely associated Hong Kong subsidiary. The overseas earnings for Bank of China and Citigroup are still a fraction of the profit generated in their home markets.

By contrast, HSBC is far from the only European bank where foreign profits are larger than for the group including the home jurisdiction. Spain’s Banco Santander – which has the second largest foreign network after HSBC, with 10 banks in the Top 1000 – is the only European bank where the group as a whole out-earned its foreign subsidiaries – by less than $200m. The situation at France’s BNP Paribas may be a one-off, as the bank had to shoulder a $8.9bn fine for breaching US sanctions on Iran and Sudan, without which the group would have earned significantly more than the foreign network.

Rethinking global networks

The importance of foreign-owned subsidiaries is clear, with both HSBC and Standard Chartered considering moving their headquarters outside of Europe. But the desire of the largest cross-border banking groups to maintain a vast presence across the globe appears to be waning. Interestingly, with the exception of HSBC many of the most profitable foreign subsidiaries this year are in mature markets, such as Santander’s presence in the US and the UK, or BNP Paribas’s bank in neighbouring Belgium. Perhaps most remarkably, the RBS operation in Ireland, which was hit hard by the eurozone crisis and had lost money every year since 2008, roared back in 2014 to become the sixth most profitable foreign subsidiary.

Top 1000 World Banks aggregates

Although the situation in the eurozone, and especially Greece, is far from resolved, faith in emerging markets has also been shaken. Growth in two of the largest emerging markets, Brazil and Russia, turned negative during 2014, while Turkey has been shaken by political and currency turbulence in the run-up to elections.

This has prompted a rethink at several of the banks that are most active in emerging markets. ING sold its Indian operation, HSBC intends to withdraw from Brazil and Turkey alongside its heavy staff cuts, and some of the banks with a large presence in central and eastern Europe have been hit hard by the conflict in Ukraine and resulting sanctions imposed on Russia. UniCredit was in the process of selling its Ukrainian subsidiary, Ukrsotsbank, when the conflict erupted in 2014 and the sale was put on hold. Raiffeisen Bank International has announced its intention to sell subsidiaries in Slovenia (which is too small to feature in the Top 1000) and Poland.

Top 1000 World Banks - Top 10 banks by growing employee numbers

Meanwhile, as we report on page 28, US utility GE has decided to almost completely withdraw from financial services. Its financial group, GE Capital, designated as systemically important by the US authorities, is not a regulated bank. However, two of its subsidiaries, in Poland and the Czech Republic, are large enough to feature in the country rankings of the Top 1000. The Czech subsidiary earned the largest profit in 2014 of any of the units known to be up for sale.

Top 1000 World Banks - Regional aggregate profitability

Selling logic

Most of the sales appear logical from a strategic viewpoint. They lost money for their parents in 2014 and represent a very small part of total group assets (as well as having a small local market share). The exception is Raiffeisen Bank Poland, which earned a pre-tax profit more than four times the size of the group profit, representing more than 10% of total assets, and is the seventh largest bank in a market of almost 40 million people. The subsidiary was only built by the acquisition of Polbank from Greece’s troubled Eurobank in 2012.

The idiosyncratic structure of Raiffeisen, owned partly by local savings banks that are in turn owned by their members, has made it difficult to issue new capital, especially to protect against adverse conditions in Ukraine, Russia and Hungary. This makes the sale of an attractive, profitable subsidiary such as its Polish operation potentially the most straightforward way to raise capital quickly.

The potential buyer is Polish insurance group PZU. This typifies a general trend for banking to fold in on its home markets at present. ING’s Indian subsidiary was purchased by local Kotak Mahindra Bank, while La Caixa snapped up Barclays’ subsidiary in Spain. Attempts in Kazakhstan to bring in foreign expertise to take on banks rescued by the sovereign wealth fund during the country’s 2009 financial crisis have given way to consolidating ownership under domestic buyers, such as the three-way merger to create Top 1000 new entrant Forte Bank.

Top 25 profits for FOS

In short, traditional European cross-border players are becoming more selective in their presence and the national champions in emerging markets are not yet ready to expand internationally. There are some tentative signs that Asian banks, accounting for more than half of the world’s banking profits, may be ready to step into the breach. Japanese banks already have a track record of international expansion, stemming from their 1980s heyday. The targets this time may be different – Asia rather than Europe – with Sumitomo purchasing one of the top 15 banks in Indonesia last year. Singapore’s role as a regional trading hub is already well established and OCBC made a substantial acquisition in Hong Kong last year.

Potentially the most far-reaching acquisition, however, could come from the Portuguese government’s effort to sell the rescued remnants of failed Espírito Santo. One Chinese bidder, Fosun, already owns Portugal’s largest insurer and could establish itself as a significant financial conglomerate in the eurozone. This is all still a long way from the large European global banks. The most internationally active Chinese and Singaporean groups still have only three or four subsidiaries in the Top 1000, the largest of which are all in Hong Kong, or in Malaysia in the case of the Singaporean banks. None has foreign assets accounting for more than 25% of the group, with most below 10%.

The Banker's new approach

There has been an important departure in our methodology this year, owing to the advent of Basel III. Previously, we excluded current year’s earnings from our calculation of Tier 1 capital, because practices in this area varied widely between banks and jurisdictions. Often, this meant deriving Tier 1 capital by adjusting balance sheet disclosures. Basel III has clarified the rules around the inclusion of current year’s earnings in capital calculations, and for this reason we have moved to simply taking the disclosed Tier 1 capital for banks that have adopted Basel III.

The uptake has been very rapid, especially in Europe. Almost two-thirds of the Top 1000 now declare compliance with Basel III or transitional rules on the road to Basel III. The effect of the EU’s single market is clear, with almost 90% of western European banks already moving to Basel III reporting. Levels of adoption are also high in Asia-Pacific and the Middle East, with roughly even rates in other emerging markets. The US is the laggard in every sense – only the top tier of globally systemic banks has adopted Basel III, and the country accounts for more than two-thirds of the banks worldwide that are still using Basel I standards.

That said, Basel III compliance can be an ambiguous concept. The Basel Committee on Banking Supervision considers the China Banking Regulatory Commission to be administering a regime that is compliant with Basel III. Our own analysis of Chinese bank reporting suggests their disclosures do not cover all the aspects of the Basel III regime. For instance, there is no reporting of counterparty exposure, which is significant for the top-tier Chinese banks that participate widely in financial markets. We look forward to finding improved disclosure as Chinese banks adapt to Basel III.

For banks generating significant profits, the change in our methodology due to Basel III may cause a slight rise in capital. This is likely to be more than offset, however, by the exclusion of other items from the new Basel definitions of Tier 1, especially when the transitional process is completed in 2019.

Dominant dollar

This year, any impact from our new methodology is likely to be dwarfed by another factor – the depreciation of many currencies worldwide relative to the US dollar.

Mergers and acquisitions in Top 1000

All our figures are shown in dollars to enable comparison, but most banks report in their local currencies. As a result, the trend toward weaker currencies, especially in emerging markets, has suppressed the capital, asset and profit sizes for many banks. This has pushed some of the smaller emerging market banks out of the Top 1000 altogether, with the capital threshold for entry falling and smaller US regional banks now dominating the bottom echelons of the ranking. The only domestically owned bank in Serbia to make last year’s Top 1000 has slipped out, Ukrainian banks have halved from six to three, while the Russian count has dropped from 29 to 19. Even in Colombia, where a vibrant banking sector has added capital in many cases, two of the smallest banks have drifted out of the Top 1000.

Top 10 most profitable foreign networks, 2014
Foreign subsidiaries in the Top 1000 World Banks

Russian banks account for most of the sharpest declines in Tier 1 capital, along with a number of eurozone banks that were required to make substantial adjustments to their balance sheet following the European Central Bank’s (ECB) asset quality review. Austria’s Volksbank, which exhibited the sharpest decline in capital in the Top 1000, showed a capital shortfall of more than €860m in the comprehensive assessment and is in the process of wind-down.

Basel compliance in the Top 1000

While many bank rankings were pressured downward by currency weakness, the comparative strength of China’s managed exchange rate – the yuan was down by less than 0.3% – only compounded their large profits. Chinese banks consolidated their grip on the top 10, taking four of the top six slots. The 5.6% decline in sterling, by contrast, contributed to HSBC slipping from fifth to ninth.

Liquidity focus

Basel III means more than how to integrate current year’s earnings into capital. The framework introduced new concepts such as the leverage ratio and two measures of bank funding risks – the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR). The LCR has already been implemented in EU and US regulation, and banks in those jurisdictions already report this number. The NSFR was completed in 2014 and new legislation to transpose it into law in the major jurisdictions is likely to follow during 2015.

In the US, the focus on funding has expanded beyond the liquidity ratios. As part of efforts to tackle systemic risk from the banks judged too big to fail, the Federal Reserve has proposed creating a capital buffer that could be based partly around reliance on wholesale funding. This source of funding can be a direct cause of contagion and systemic stress if one large bank is at risk of failure.

The foreign exchange effect

We do not have comprehensive data on each form of funding, but we do track deposits, which allows us to identify the scale of non-deposit funding at many banks. Many of the banks that rely most heavily on wholesale funding are investment banks with little or no retail operations, including Morgan Stanley and Goldman Sachs in the US, Nomura in Japan and Brazil’s BTG Pactual.

It is also noticeable, however, that Scandinavian banks are heavily dependent on wholesale funding, especially in Denmark. These countries have highly developed markets for covered bonds, and Denmark in particular has argued successfully in some cases that it should receive dispensations for this in EU legislation implementing the Basel rules.

These long-established specificities in certain markets are less worrying than sharp declines in deposit funding. The change at Denmark’s Jyske Bank is at least partly due to its 2014 acquisition of mortgage lender BRFkredit, a substantial issuer of mortgage-covered bonds. Most of the other large declines in deposit funding are in markets where the exchange rate is under heavy pressure, suggesting retail customers are pulling their money out of the bank and possibly converting it into hard currency to protect against depreciation. Venezuela is also an economy under severe pressure: the official exchange rate is stable, at about 6.3 bolivars to the dollar, but the unofficial rate fell as low as 155 during 2014. Little wonder that customers are reluctant to keep Venezuelan bolivars in the bank.

Top 10 declines in deposit funding

Looking ahead

At the same time as completing Basel III, the Basel Committee on Banking Supervision is also examining a series of refinements that some observers have dubbed Basel IV. These include the possibility of raising the leverage ratio, from a current minimum of 3%. The US has already imposed a ratio of 5% on its banks, or 6% for the systemic market leaders, while the UK is requiring a level equivalent to 4.05% for its largest banks.

Top 10 loan to deposit ratio

The Banker’s capital-to-assets ratio is not exactly the same as the leverage ratio, which includes some off-balance-sheet items such as trade finance. But it provides a good proxy for which banks are likely to be close to the wire if Basel raises the leverage ratio beyond 3%. As with loan-to-deposit ratios, most of the lowest capital-to-assets ratios are at specialised banks. Dutch state-backed policy lenders Waterschapsbank and Gemeenten invest mainly in government-guaranteed projects that mean much lower default risk than conventional lending. Similarly, Axa Bank Europe carries out certain banking functions for the European insurance group. Other banks with low capital-to-asset scores are in jurisdictions that have tolerated this situation rather than applying the rigours of Basel; for example, Iran or Japan’s smaller banks.

Nonetheless, there are a number of major European groups that are a long way down the list, especially in France and Germany. France’s second and third largest banks, BNP Paribas and Société Générale, have capital-to-assets ratios of 3.39% and 3.62%, respectively. Germany’s largest and fifth largest lenders – Deutsche Bank and DZ Bank – come in at 3.74% and 3.33%, respectively.

Other parts of Basel IV examine the ways of calculating the Basel ratio, in which assets are weighted based on expected risk. The fundamental review of the trading book proposes new ways of calculating risk-weighted assets (RWAs) for market risk, while Basel has also proposed new approaches to credit and operational RWAs. Overarching these changes, Basel is considering whether standardised methods designed by regulators should act as a floor for banks’ internal models to calculate RWAs.

The mathematics of these changes may be profoundly complicated, but the overall outcome appears as if it may be strikingly simple: higher RWAs for banks that use internal models and have large trading desks. The enthusiasm for internal models has always been greatest in European systemic banks. Those that have the lowest risk weights today – measured by calculating RWAs as a proportion of total unweighted assets – are likely to be most affected by the Basel IV agenda.

Among the top 50 banks by Tier 1 capital, the lowest RWA-to-total asset ratios are dominated by European banks. Switzerland’s UBS is at the top of the list, on less than 21%. Swiss regulators are currently examining whether the internal models of the country’s two systemic banks, UBS and Credit Suisse, differ significantly from standardised methods. In December 2014, an expert group commissioned by the Swiss regulator reported on how to develop the country’s financial markets further. One of the report’s conclusions was that regulators might want to consider RWA floors or multipliers, and higher transparency requirements. In practice, Credit Suisse already has a relatively high unweighted capital-to-assets ratio, so a rise in RWAs would put less pressure on its Basel ratio.

France and Germany also feature prominently on the list of low RWAs, with Japan and Canada the only countries outside Europe to exhibit similarly low ratios. However, banks such as Norinchukin in Japan, Rabobank in the Netherlands and France's Crédit Mutuel all have comparatively high capitalisation already, making them less at risk from tougher methods for calculating RWAs.

Some European banks are already planning to strengthen their capital positions by divesting assets. Deutsche Bank has announced publicly that it is targeting a 5% leverage ratio, while HSBC plans to reduce RWAs by £290bn ($458.6bn). Interestingly, HSBC had the second largest increase in RWAs in 2014 at $127bn, so part of the balance sheet reduction would only be reversing the recent growth. By contrast, the restructuring process at RBS and Lloyds continues apace, with two of the largest declines in RWAs during 2014. Sberbank’s sharp fall is accounted for by the weakness of the rouble – at a constant exchange rate, the bank’s balance sheet was growing rapidly.

Asset quality

Lowest risk weighted assets among Top 50 banks

One item that has dominated recent years’ rankings, but features less prominently this time, is asset quality. The ECB’s 2014 asset quality review seems to have been successful, perhaps even pre-emptively, in persuading eurozone banks to clean up their balance sheets. The one worrying picture is Greece, where the review resulted in significant rises in loans classified as non-performing even after a domestic asset quality review had taken place the year before. The situation can only have deteriorated during 2015 amid the uncertainty over Greece’s position in the eurozone.

By contrast, while impairments remain high in other peripheral eurozone countries, they are universally on the way down. The most dramatic improvement is in Ireland, where new impairments have fallen sharply after several years where they wiped out most of the banks’ operating income.

Impairment charges in Greece are exceeded only by war-torn Ukraine, both as a proportion of total operating income and in terms of the rise as a proportion of income. It is no surprise that Russia, faced with sanctions and recession, records the third highest rise in total impairment charges to total operating income. Austrian banks, exposed to Ukrainian and Russian markets, also took a significant hit from impairment charges.

Venezuela, which like Russia has been heavily affected by falling oil prices, has seen a sharp rise in impairments. Elsewhere, the warning lights are flashing for China and Hong Kong, where banks will also have significant Chinese exposure. Both are among the top five rises in impairment charges in percentage terms, although in both cases, the rate of impairment is still low as a proportion of total income. Asset quality in Vietnam and Indonesia is also deteriorating, with impairment charges in Vietnam exceeding a quarter of total operating income. Perhaps the rebalancing of performance between Europe and Asia will continue in the 2016 ranking – but Greece could still spoil that trend.

Top five rises in risk weighted assets

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