The Global Banking Industry Made a Comeback in 2009, but Significant Challenges Remain, Particularly in Developed Markets
Proposed Regulatory Changes Would Force Banks to Raise Large Amounts of Capital or Pare Down Their Activities, Constraining Growth and Profitability and Diluting Shareholder Value
| Source: The Boston Consulting Group
NEW YORK, NY--(Marketwire - February 25, 2010) - The banking industry staged a remarkable
turnaround last year, but the recovery belies the substantial challenges,
changes, and uncertainty that remain, according to a new report from The
Boston Consulting Group (BCG). In developed banking markets, especially,
optimism and skepticism come in equal doses. The report, "After the Storm:
Creating Value in Banking 2010," is being released today.
After bottoming out at $3.1 trillion in the first quarter of 2009, the
market capitalization of the global banking industry more than doubled over
a ten-month stretch, to $6.4 trillion. The industry's average total
shareholder return (TSR), at 47.1 percent, was nearly the mirror image of
its sharply negative performance in 2008. It was the highest it had been
since 2003, following the technology stock crash.
Two-Speed World
The recovery reflects the development of a two-speed world, characterized
by slow growth in mature economies and higher growth in many rapidly
developing economies. Regionally, banking TSRs were highest in Central and
Eastern Europe and Latin America last year. The banking TSR of the BRIC
markets -- Brazil, Russia, India, and China -- climbed to 85 percent, up
from -53 percent in 2008.
"Banks in the dynamic half of the two-speed world will thrive as their
economies return to form and more consumers become active in banking," said
Ranu Dayal, a BCG senior partner and coauthor of the report. "Foreign banks
will continue searching for footholds in these markets, in part to blunt
the impact of the next crisis but mainly to tap into growth opportunities
unique to rapidly developing economies."
In many OECD countries, on the other hand, there are constant reminders of
the tenuous state of the recovery. "The provenance of the improvement is
cause for concern," said Lars-Uwe Luther, a BCG partner and coauthor of the
report. "It remains to be seen how banks, and whole economies, will fare in
the absence of stimulus programs. The support will fade away before the
underlying problems do."
"Still, the performance of banks in developed markets should not be
overlooked," Luther said. The banking TSRs in Australia, Canada, France,
and Spain ranged from about 51 to about 74 percent. (The global
all-industry average was 39 percent.) The average after-tax return on
equity for banks in Spain, Canada, and Australia ranged from 12.6 to 14.9
percent, well above the global banking average of 4.1 percent.
The Regulatory Tsunami
Banks face a concerted push -- on a number of fronts -- to raise capital
requirements, discontinue certain products, and curtail risk-taking
activities. The most sweeping changes are those recently advanced by the
Basel Committee on Banking Supervision. The proposals will improve the
stability of the banking system, but they are bound to lead to smaller
balance sheets and lower profits.
BCG modeled the potential effects of these proposals on 32 large banks
across 12 countries and found that the changes would cut their Tier 1
capital ratios by about half. To keep their Tier 1 ratios in the range of 6
to 8 percent, the 32 banks would need to increase their core capital by 15
to 40 percent, or $280 billion to $650 billion.
As a result, banks will need to raise more capital or else limit the scope
of their activities. The former will dilute the value of existing shares,
while the latter will impair both revenues and profits. Stock prices could
fall by about 12 to 25 percent as a result of the dilution of shares if
banks were to raise the amounts of capital described above (assuming
constant price-to-book ratios). Banks could also increase margins to help
build up capital.
"Not every bank will see this as a threat," said Peter Neu, a BCG partner
specializing in risk management and another coauthor or the report. "For
banks that have stable sources of funding and strong capital positions,
this upheaval represents a once-in-a-generation opportunity to increase
market share. One bank's weakness will be another bank's gain."
World's Largest Banks
The market capitalization of the world's 30 largest banks grew by 70
percent to $2.8 trillion. This is a stark contrast to 2008, when it fell by
half and each of the 30 largest banks lost market capitalization.
-- Three of the five largest banks were from China, including the largest
bank, ICBC. Its market value soared to $269 billion, up from $174 billion
in 2008.
-- Four of the ten largest banks were from the United States. It was the
first time since 2005 that four U.S. banks placed in the top ten, but the
rise of some banks was primarily the result of takeovers and
recapitalizations: in 2009, European and North American banks issued $263
billion in secondary equity offerings, a record high.
-- Many banking industries became more concentrated from 2007 through 2009.
For example, the market capitalization of Brazil's three largest banks, as
a percentage of the local industry's market value, rose 14 percentage
points to 72 percent. There were also significant rises in the United
Kingdom, Australia, and the United States.
To receive a copy of the report or arrange an interview with one of the
authors, please contact Eric Gregoire at +1 617 850 3783 or
gregoire.eric@bcg.com.
About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm
and the world's leading advisor on business strategy. We partner with
clients in all sectors and regions to identify their highest-value
opportunities, address their most critical challenges, and transform their
businesses. Our customized approach combines deep insight into the dynamics
of companies and markets with close collaboration at all levels of the
client organization. This ensures that our clients achieve sustainable
competitive advantage, build more capable organizations, and secure lasting
results. Founded in 1963, BCG is a private company with 68 offices in 39
countries. For more information, please visit www.bcg.com.