Top 1000 World Banks 2007

Banks around the world continued to produce record profits and increased profitability for the fourth successive year in 2006, which proved to be a good year for the world economy and a bumper year for banks, with significantly improved growth in all key banking indicators.

The banking bonanza continues as The Banker’s Top 1000 World Banks ranking for 2007 shows the overall aggregate level of bank profitability (pre-tax profits to Tier 1 capital) continuing its upward march, reaching a record 23.4%, ahead of last year’s 22.7% and 2005’s 19.9%.

Banks have continued to achieve increasing growth and profitability on the back of a very positive economic environment in both the major advanced economies and key emerging markets, such as China. Fitch Ratings noted that growth in the main developed economies reached 2.9% in 2006, compared with 2.3% in 2005, and the euro area experienced its fastest growth rate for six years as Germany’s recovery flourished and US consumer spending continued.

Strong growth

The Banker’s 2007 ranking registered strong growth in all areas, particularly profits. Aggregate pre-tax profits for the 2007 Top 1000 rose a stunning 21.9% to reach a mammoth $786.3bn, more than 3.5 times the $222.8bn aggregate profits in our 2002 ranking. This latest surge in profits contrasts with results in last year’s ranking, which had shown a slower profit growth of 18.6% compared with the two previous boom years, and indicated that the banking party may have been drawing to a close.

But the slowdown did not continue and banks seized the opportunities available in the benign conditions of 2006 and pushed ahead on all fronts, particularly in retail banking. Unlike the previous year, the 2007 ranking represents a rapid resurgence for the banks and, just as profits showed strong growth of 21.9%, there was also substantial expansion in aggregate Tier 1 capital and aggregate total assets.

Capital boost

To accommodate rapidly expanding balance sheets, banks boosted capital: aggregate Tier 1 capital increased by a sizeable 18.4% to $3365.1bn in the 2007 ranking. This represents a marked change from the modest 3.7% growth last year and a return to the kind of growth rates seen in the first two years of this four-year banking boom (15.2% and 20.5%).

Aggregate total assets followed the same expansion pattern with banks building their loan books across all product areas. Overall assets grew by a solid 16.3%, almost three times the previous year’s growth rate, to reach $74,232.2bn. While EU27 banks produced 20.5% asset growth and the US banks 12.5% in the 2007 listing, emerging markets, such as China, are achieving extremely high lending growth. The total assets of the four huge state-owned Chinese banks grew by 27.4% in 2006, and further similar growth is expected.

Fears of a US meltdown and problems in the US sub-prime mortgage sector did not impact materially on 2006 performances, and banks took advantage of lower oil prices and vibrant consumer expenditure. However, as gross domestic product (GDP) growth in the major economies is expected to decline to 2.3% this year and interest rates are tightening, the banks may be moving into a slower expansion period.

Record growth

Have the world’s banks reached their peak after four successive record years? If the record run is to continue, from where will the growth come? Key economies, such as Japan and Germany, now have their banking sectors back in the black after taking some severe losses in recent years. Japan’s 101 banks produced $52.9bn in profits in this Top 1000 and Germany’s 88 banks totalled $34.6bn, with only four loss-making banks between them. But can they expand yet again? Japan’s banks account for 10% of the Top 1000 Tier 1 capital and total assets but just 7% of overall profits; and the return on capital of the Japanese banks remains weak, at 16.2%, and well below the global average. German banks’ profitability is also weak at 13.6%. Without major structural change, neither country is likely to provide above average profitability or growth.

US banks remain the bulwark of the Top 1000 as they have done for years but US dominance of the ranking nevertheless appears to be in slow decline in some respects. The 185 US banks in the 2007 listing account for 19.1% of aggregate Tier 1 capital, at $642.1bn, and 13.2% of aggregate assets, at $49,826.4bn, which through good efficiencies account for a large 23.6% of aggregate profits, at $185.5bn. And, with a return on capital this year of 28.9%, US banks are well above the 23.4% global average and remain some of the most profitable in the world.

Even so, US banks as a group are losing their grip on the rankings. The number of US banks has slipped from 211 in 2004 to 197 in 2005 and 2006, to 185 in 2007. The US proportion of aggregate totals is also slipping. From 22%, 15% and 37% of Tier 1 capital, total assets and total profits, respectively, in the 2004 Top 1000, the US banks declined to 20.7%, 13.7% and 26.5% in the 2006 Top 1000, and to 19.1%, 13.2%, and 23.6%, respectively, of the 2007 ranking. Although the changes are not large, the US banks’ role in global banking is certainly less than it was.

EU role expands

The EU role, in contrast, is picking up slightly. The EU provides the largest grouping of banks in the ranking – 286 in 2006 and 279 this year – and all key indicators show that the overall EU proportion is growing. From 40.7% of capital, 50.7% of assets and 37.4% of profits in 2006, the proportions have increased to 42%, 52.5% and 40.7%, respectively, in 2007, making the expanded EU27 banks by far the largest grouping. Profitability is also improving, increasing from 20.9% in 2006 to 22.7% in our latest ranking.

Among the EU27 banks, the 18 UK banks in the 2007 Top 1000 listing remain the most profitable country group, providing an aggregate $81.5bn in pre-tax profits with a return on capital of 27.3%, well ahead of the EU27 average of 22.7% but behind the US. The UK has four banks in the Top 25 world banks, and remains well ahead of the other Europeans in key aggregate indicators. However, in terms of profitability (return on capital), Belgium leads the Europeans with a 32% return on capital , ahead of Sweden (29.5%), the UK, Spain (25.3%), France (23%) and Germany at the bottom with 13.6%.

Better performance

Other areas have continued to provide healthy growth. The 174 Asian banks (excluding Japan) in the Top 1000 (up from 163 previously) showed a 20.2% growth in profits as the Chinese, Australian, South Korean and Indian banks all boosted performances. Aggregate Asian capital increased by 26.8%, preparing the way for the future as aggregate assets expanded by 16.2%. These Asian banks are expected to expand considerably in the future and account for much more than this year’s 14.5% of aggregate Tier 1 capital and 12.2% of overall profits.

The Middle East banks have increased their presence in the ranking from 83 last year to 94 this year, with Bahrain’s Awal Bank leading the new arrivals list. With oil prices strong and Middle East banks awash with liquidity, they have boosted profits by 30.5% to reach $26.5bn and achieved a 23% return on capital, slightly lower than last year’s 24.5% aggregate return. Despite this growth and the huge wealth in the region, however, the 94 Middle East banks are still relatively small players on the global scene, accounting for just 3.4% of aggregate Tier 1 capital, 1.7% of total assets and 3.3% of aggregate profits.

The 42 Latin American banks had a relatively sluggish year: aggregate profits were up just 4.9% to $18.2bn, overall lending or total assets increased by a significant 26.2%, and Tier 1 capital moved up by just 7.3%.

Big regional movers

Regionally, the major movers in profit terms are the EU27 and Middle East banks, achieving growth of 32.4% and 30.5% respectively. These are well ahead of the Asians (20.2%), the US (8.5%), the Latin Americans (4.9%) and the Japanese (3%).

Although mergers and acquisitions and the consolidation trend will continue to have an impact on the rankings, there were relatively fewer big deals in calendar year 2006 than seem likely this year – the current acquisition of ABN AMRO is expected to herald a number of big deals in 2007. BNP Paribas’s acquisition of Italy’s BNL and Bank of America’s purchase of MBNA in 2006 were significant moves, the latter catapulting Bank of America to the top of the current rankings.

For the first time since our 1999 ranking, a new bank heads The Banker Top 1000. Citigroup’s eight-year reign at the top has come to an end as it was narrowly overtaken by Bank of America Corp (BoA) following its purchase of MBNA Corp, among other acquisitions, which lifted BoA’s Tier 1 capital at the end of 2006 by 23% to $91.1bn, just slightly ahead of Citigroup’s at $90.9bn.

Rule of the titans

Although the top six banks, or six titans, were the same as last year, their positions shifted markedly. HSBC Holdings, despite an 18.1% increase in Tier 1 capital, slipped from second to third place with $87.8bn and Crédit Agricole jumped up to fourth from sixth with a 40.1% rise in Tier 1 capital to $84.9bn. With JP Morgan Chase and Mitsubishi UFJ Financial Group, these six titans, like last year, account for 15% of the Top 1000 Tier 1 capital and 13.4% of aggregate assets along with 16.6% of total profits.

Although there is a major gap between the six titans and the rest at the top of the ranking, two Chinese banks, ICBC and Bank of China, have jumped into seventh and ninth places following massive initial public offerings (IPOs). Along with eighth-ranked Royal Bank of Scotland, they are now within striking distance of the titans.

The Top 25 listings provide another interesting snapshot of the role of the biggest banks in the global banking community. The Top 25 banks by Tier 1 capital provide 40.9% of the Top 1000 aggregate capital, 42.8% of aggregate assets and 40.8% of aggregate profits. This compares with 36.7%, 41.6% and 40.5%, respectively, in last year’s ranking, emphasising yet again that the bigger banks are continuing to take a larger share of the global banking pie.

Examining the world’s biggest banks, purely in terms of total assets, provides an alternative Top 25 ranking , which is led this year by Switzerland’s UBS. The Swiss bank’s total assets rose 23.4% to $1963.9bn, just ahead of last year’s winner Barclays Bank on $1956.8bn.

The 10-year growth picture of the Top 25 world banks’ assets shows again how the big banks have become massive. Our 1998 listing shows the Top 25 accounted for 28.3% of the total assets in the Top 1000; in the 2007 listing, they account for an ever-expanding 42.8% of the total, up from 40.8% last year.

The Banker also provides a Top 25 listing based on market capitalisation data from June 12, 2007 . As it has done for many years, Citigroup heads this ranking with a market cap of $261.3bn, ahead of Bank of America with $220.4bn; 18 banks in the list are also in the Tier 1 capital Top 25. The key development in this listing is that, following large IPOs, three Chinese banks feature in leading positions: ICBC (fourth), Bank of China (sixth) and China Construction Bank (seventh), signalling their arrival on the global financial stage.

New winners appear

This year’s regional winners list highlights some new names. Naturally, Bank of America breaks Citigroup’s long global winning streak and heads North America while China’s ICBC comes out top in Asia and Brazil’s Banco Itaú leads in Latin America. In terms of assets, UBS leads globally and in Western Europe, and Banco do Brasil and Bank Leumi are the new winners in Latin America and the Middle East. The US’s Wintrust Financial Corporation provides the highest return on capital.

Looking closely at the new Top 1000, the ranking contains 45 new entrants, led by Bahrain’s Awal Bank and China’s Beijing Rural Commercial Bank, which came in at 401 and 458 respectively. And Greek Postal Savings Bank rejoins the listing in 456th place. There were also 69 banks that moved up more than 100 places, led by Libyan Arab Foreign Bank and Nigeria’s Intercontinental Bank, which rose by 529 and 523 places, respectively. In terms of specific ratios monitored, Philippine National Bank has the highest disclosed NPL ratio, 51.6%, and Taiwan’s Chinatrust Financial Holding has the highest disclosed BIS capital ratio, 119.7%. In contrast, the worst disclosed BIS ratio is Agricultural Bank of China’s at -17.6%. This negative ratio reflects Agricultural Bank’s poor overall capital position as opposed to its positive Tier 1 capital, which makes it the 65th largest bank in the world; the bank has the fifth highest NPL ratio in the Top 1000, at 23.4%, and is the last of China’s big-four state banks to be prepared for part sale.

Can the party continue?

Looking ahead, can the party continue and produce record results again this year, for the fifth successive time? Large banks are racing for global rather than European clout and rating agency Moody’s said in a recent report that more consolidation in Europe is likely in the future, both at domestic and cross-border levels. “This trend is supported by lower obstacles to cross-border operations, abundant liquidity, economies of scale in terms of technology, more assertive shareholders, intensified competition and large war chests accumulated by banks over recent years,” it said.

The economic outlook in 2007 may be less favourable than last year’s in developed markets but this is not the case in many emerging economies, which continue to boom. Uncertainties and tighter rates may certainly cramp growth but, like last year, the adverse impact is yet to be felt. Contrary to nervous expectations the banking boom may roll on.

HIGHLIGHTS

• The aggregate level of bank profitability in the 2007 Top 1000 world banks continues its upward march, reaching a record 23.4%, up on last year’s 22.7%.
•  Aggregate pre-tax profits rose a stunning 21.7% after slowing to 18.6% last year, reaching a mammoth $786.3bn.
• Growth in Tier 1 capital and assets in the 2007 Top 1000 world banks was substantial at 18.3% and 16.3% respectively, with aggregate volumes of $3365.1bn and $74,232.2bn respectively.
• Emerging markets are achieving extremely high lending growth: the four big state-owned Chinese banks grew their total assets by 27.4%.
• US banks are losing their grip on the rankings in terms of numbers and their proportion of aggregate totals is slipping but they remain the bulwark of the Top 1000.
• The EU27 provides the biggest regional grouping in the listing with 279 banks, and their proportions of all the key indicators are growing.
• Two Chinese banks are now within striking distance of the six ruling titans of the Top 1000 listing.
• The Top 25 banks by Tier 1 capital in the listing have 42.8% of aggregate assets and 40.8% of aggregate profits.