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.
One central backbone of strength is the breadth and sustainability of banks’ home-market franchise in retail financial services – both banking and non-banking. Most of Moody’s highly rated banks have strong retail franchises; they also have a clear, sensible business model and risk-averse strategies.
A stable and defendable retail franchise can in some cases support bank ratings that, absent this strength, would fall further down solely on the basis of weak financials. A strong home retail franchise – even if it is not as profitable as in another high-margin market – represents a stable and reliable cushion for earnings volatility coming from other activities – for example, wholesale, investment banking, trading, emerging markets.
A strong franchise in retail financial services is associated with a stable and defendable client base. The concept of proximity banking remains a powerful shield in the banking industry. Shareholder value can be created by cutting costs and boosting revenues, for example through product cross-selling. But to achieve any of these objectives a bank needs clients – the more stable and stickier the better.
It is really not that difficult for a good bank to hold on to its customers. The main reasons for losing clients on a massive scale would be poor services, glaringly uncompetitive pricing, and lack of confidence in the bank. The last can have dreadful consequences – a bank run – but it almost never occurs in developed markets these days. As one example among several, 10 years ago Crédit Lyonnais was in a dire state – ultimately having to be bailed out twice by the French government. However, even in the midst of the crisis, very few retail and small-business clients panicked and left the bank, which in time turned around and restored sound fundamentals.
In this, banks are different from, say, car manufacturers. A good car brand can be sold to a large number of new clients with the appropriate marketing effort. However a bank may not be able to sell too many products if it lacks an already existing client base (or one that can be acquired), and therefore it will not be able to satisfy either shareholders or creditors.
Financial products are highly commoditized in domestic markets and cross-border, and the unique-offer advantage hardly exists. The only avenue is for new entrants – such as the few surviving internet banks – to act as loss leaders for a few years, assuming they have a strong parent behind willing to support them for the longer term.
There are few big surprises in the 2002 ranking. Major mergers and acquisitions in the industry have been few and far between. This year is seeing more mergers – in France (Crédit Agricole with Crédit Lyonnais), in Norway (Den norske Bank with Gjensidige NOR), or in Germany (Landesbank Schleswig-Holstein with Hamburgische Landesbank) – but not on the scale of such transactions a few years ago. As soon as top bankers feel safer in their markets, consolidation will undoubtedly take off again.
But bigger is not necessarily better, as several examples of mega-transactions painfully carried through in recent years have shown. Engaging in mergers or mega-acquisitions in and of itself is not a recipe for more robust financial health. Often such transactions have a defensive character – merging with Bank A to avoid being taken over by Bank B – or the aim of securing simply a bigger asset or business size. The perception, not always validated by reality, is that in rough seas an oil tanker is safer than a fishing boat.
Mergers are not a silver bullet solution for financially weaker banks, at least not before their financial health improves more significantly on a stand-alone basis. If anything, banks with stressed fundamentals that aim at a merger as a way to patch up their weaknesses usually end up creating new problems on top of existing ones. Senior management teams may become bogged down in trying to implement the transaction – often a painful process of corporate in-fighting – rather than focusing on the task of improving the bottom line: cutting costs, boosting revenues, and improving the risk profile.
By merging and afterwards stalling on integration, two banks with mediocre performance will end up creating a much bigger bank but with the same mediocre performance – or worse.
Little cross-border advantage In Europe, there seem to be few economic advantages in cross-border mergers. There is less hope for achieving meaningful efficiency than in domestic mergers. The exception is the one-off opportunity of western European and US banks expanding in the integrating central and eastern European economies by taking over weak but well-positioned local banks. Many western institutions have already taken advantage of this, and there are few remaining solid candidates left.
There remain many areas of risk and uncertainty in banking: asset-quality problems, including concentration risk; operations in financial markets – including indiscriminate use of derivatives; foreign expansion, especially in emerging markets that are not properly understood; ALM or liquidity mismanagement; or faulty management practices.
To some extent all these are the result of flawed management decisions and poor execution at different levels – sometimes of fraud as well – at various stages in a bank’s life. Seeking to maximize returns for the short term by choosing to ignore longer-term risks; aiming at conquering new markets for the sake of raw market power, as if the financial services industry were a warfare zone; growing – internally or through acquisitions – for the sake of sheer growth: all these strategic options can indeed be the main source of problems for banks.
The seeds of future problems are planted when the markets grow and expand and the happy bankers feel like masters of the universe. But in the banking industry, credit strength is defined by the absence of downside risk at least as much, if not more, as by the presence of any upside potential.
Many top bank management teams (but not all) are more aware of potential risks than their predecessors were. In many instances, the flamboyant bank chief executive with oversized plans and global ambitions has been replaced by – or more rarely has converted to – a top manager who is more realistic, more hands-on, and more risk-averse.
