Bank Atlas - Top 200
By Country: A-C | D-I | J-M | N-R | S-V
PERHAPS THE MOST remarkable news from the banking industry during the past 18 months was that no generalized disaster arose. Many observers had expected a banking crisis similar to the last major one in the late 1980s and early 1990s. It hasn't materialized. Banks in the industrialized world do not appear to face imminent collapse, or even a more remote one. For the first time in recent memory, a corporate credit crisis did not lead to a banking crisis.
By and large, Moody's Investors Service's ratings on the industrialized world's banks have remained quite stable. Some ratings have dropped (especially in Germany), others have risen, but most did not budge. We should expect the same trend for the rest of the year.
Bank results in 2002 ranked in general from weak to normal, with very few spectacular positive jumps. But they are in most part a consequence of higher loan-loss provisions and lower revenues as a result of a decline in new lending and in investment-related activities (such as asset management, private banking, or bancassurance).
Cyclical effects
Higher provisions reflect, however, a low point in the economic cycle rather than the lending excesses so evident during the last banking crisis. We should expect the level of provisions to decline moderately this year. And, on average, banks' recurring earning capacity remains sufficient to offset rising provisions and other unexpected charges - such as restoring solvency to a life insurance subsidiary hurt by the drop in equity markets.
As a consequence, this year's Euromoney Bank Atlas shows no visible shrinkage in shareholder equity positions. Although stress on earnings has partly eroded the capital-formation capacity of many banks, the industry remains well capitalized.
As opposed to 10 to 15 years ago, banks also show stronger and more diversified earnings. Their bottom line is less dependent on lending margins, especially from the corporate sector. The credit-risk management tools that are utilized today, even if they do not always perform optimally, are nevertheless light years ahead of the makeshift credit controls of the 1980s or early 1990s.
Loan concentration risks are materially lower, especially in the US market but also in Europe, and this is one key reason why none of the recent major pockets of stress (US or European corporate defaults, Argentina, and so on) has been a life-threatening problem to most major banks. Again, a temporary drop in earnings, unpleasant as it is for those stockholders invested for the short term, does not necessarily signal a chronic illness.
An important development in recent years has been the transfer of credit risk from the originating banks to the market at large. There is still plenty of credit risk floating around, but it is spread among myriad end-investors - through securitization in CDOs, through credit derivatives, and through loan syndications.
New participants in the credit markets have ended up with worrisome exposures - insurance companies, hedge funds, other investment funds, lower-tier banks, and so on. Some are not even aware that these new (for them) activities carry credit risk. The market - which includes various insurers - is clearly still loaded with such credit risk, but the originating banks end up with lower credit exposures.
Rating stability now applies in most major banking systems in the industrialized world - the US, the UK, France, Spain, Canada, Australia, Italy, the Netherlands and Switzerland. Some systems are more profitable than others. US, UK, Irish or Spanish banks, for example, preserve comfortable levels of profitability. French, Dutch, or Italian banks enjoy more modest profits, but all show market stability, relatively good earnings diversification, ample liquidity and comfortable solvency.
However, an excessively strong euro and a lack of effective stimuli could end up hurting at a more structural level the region's export capacity, the lifeblood of many European economies. If so, some local banks might suffer further, and proportionately badly: problems in their core home markets are more likely to hurt them than credit exposures to faraway corporates or countries.
Banks in Japan remain in a more precarious state, sitting on huge amounts of legacy non-performing loans, weakening investment portfolios and thin capital. It is still not clear if and how they will be able to progress from weakness to a more normal situation. Meanwhile, stubbornly low interest rates and a deflationary economy do not bode well for a marked recovery in profitability. Nonetheless, systemic risk for Japanese banks is low in the light of the strong regulatory support framework and abundant liquidity expected.
In Germany, the banking sector remains stressed, and 2003 may not see marked improvement. During the past two years or so the major banks have started - some earlier than others - to take more drastic measures to cut costs and reduce loan concentration risks.
And yet the major challenge remains the improvement of revenues. The large German privately owned banks' retail activities are barely profitable, owing to a historical legacy (banking viewed as a public service), antiquated structures (high barriers among private banks, public-sector banks such as savings banks and Landesbanken, and cooperative banks), and flawed strategies. Germany is, for example, one of Europe's largest consumer-finance markets, but the big domestic banks are not among the leading players.
No terminal threat
However, as bad as German banks' profitability is these days, the system is not threatened with solvency or liquidity risk. Short of a massive credit crunch or a severe recession, the country's large banks should manage in time to become a little more efficient and profitable, and with luck might stay out of new troubles.