The latest Top 1000 world Banks 2017 ranking results suggest that the aggregate Tier 1 capital of banks in this year’s rankings has jumped 3.85 per cent, meaning the global banking sector holds 72 per cent more capital than at the outbreak of the global financial crisis in 2008.
The report said “To be included in the 2017 edition of the Top 1000, banks must hold at least $442.12m in Tier 1 capital, $38m higher than 2016’s entry threshold. It is the third biggest increase in a decade, topped only by the 2013 and 2014 rankings, when banks were scrambling to satisfy new capital requirements under the first phase of Basel III. Even more impressive is that this occurred despite currency depreciation.
“For the industry their problems have simply moved on from a lack of safety and soundness, to a lack of profitability. Global pre-tax profits slid once again in 2016, this time by 1.21 per cent, yet there is little uniformity around the world. Africa’s return on assets (ROA) is higher than any other region. Its return on equity (ROE) and return on capital (ROC) are second to Latin America, but excluding crisis-ridden Venezuela, where results are distorted by triple-digit inflation and a drastically overvalued official exchange rate, Africa sweeps the board for profitability indicators.
“Asia-Pacific still accounts for the lion’s share of global profits, but over the past four years North America has chipped away at its dominance. With the US Federal Reserve on course to lift interest rates to 1.5 per cent by the end of 2017, the trend looks set to continue into next year’s rankings. Other regions, however, are battling significant macro-economic headwinds, and with varying success.
US and China’s mid-tier engines
According to the 2017 report “US and Chinese banks have retained their dominance, each accounting for four of the top eight spots in the Top 1000. The only change to the leaderboard sees Bank of America move from fifth to sixth at the expense of Agricultural Bank of China. But on the whole, in 2016 Asia’s rising superpower cemented its status as the world’s biggest banking market by assets and Tier 1 capital, pulling further away from the US, which remains runner-up by both measures.
“Nonetheless, the US continued its unassailable post-crisis recovery, posting solid but sustainable growth in total assets, capital and profits. Mid-cap names made the strongest gains, the largest being KeyCorp and Huntington Bancshares. The Ohio-headquartered pair grew Tier 1 capital by between 30 per cent and 40 per cent after acquiring smaller rivals. Once again, the US has more banks in the Top 1000 than any other country; of its 10 new arrivals, the standout is Citizens Bank, debuting at number 99 after being sold by RBS in 2015.
The headline change in China, as in the US, is that growth is now fuelled by second-tier banks. Since hitting a high of 31.1 per cent in the 2014 rankings, sector-wide Tier 1 growth has decelerated at roughly the same rate as its big four banks (ICBC, China Construction Bank, Bank of China and Agricultural Bank of China). In the 2015 rankings, the sector and the big four grew by about 20%, while in last year’s rankings this figure was circa 10%.
“However, in this year’s rankings, the big four have grown by less than 2 per cent while the sector is 5.66 per cent bigger. This suggests the leading banks are reaching their size limit, while a number of second-tier lenders – and even more outside the global top 50 – continue to post double-digit growth.
China’s ascent is in sharp contrast to Asia’s other major market, Japan. By every measure, the Chinese banking sector is more than twice as profitable as Japan’s, which has been squeezed by the Bank of Japan’s continued aggressive monetary policy. In January 2016, it took the historic decision to move into negative territory, dropping rates to -0.1 per cent. Net interest income at its biggest four lenders dropped 6.94 per cent from 2015 to 2016, but this does not fully explain the 11.3 per cent drop in overall profits.
There are signs of encouragement though. Of the 90 banks in the Top 1000 only one posted a loss, and Sumitomo Mitsui Financial Group has leapfrogged Crédit Agricole, BNP Paribas and Goldman Sachs to place 12th in the overall rankings.
