Boston, June 07, 2012—2011 was a year that most bank executives will want to forget. But it certainly will be memorable for the scope and scale of banks’ value shift from the developed world to the emerging nations. And it is notable for how the shifting center of gravity of market capitalization is further shaking up the ranks of the world’s top banking firms.
These are some of the key findings of a new study by The Boston Consulting Group. The results of the study are being released today.
Banks all over the world—and particularly those in Europe—fared poorly at a time when many observers were expecting the global economy to be recovering. European banks’ loss of value helped depress the capitalization of the entire global sector by 20 percent during 2011—an alarming reversal of the sector’s recovery following the worldwide banking crisis. With the exceptions of Canada and Australia, developed nations’ banking sectors suffered big setbacks, delivering disappointing total shareholder returns (TSRs) and profits.
The overall picture portrays a marked swing in banks’ value from West to East, a trend first identified by BCG in 2008. From 2007 through 2011, Western Europe’s banking market cap plummeted by 58 percent, with the banks of Central and Eastern Europe losing 47 percent. For comparison, consider that the global banking sector lost 34 percent of total market cap in that time. North America’s banks fared a little better in relative terms, shedding 25 percent over the four-year period.
“The growing prominence of emerging markets is plain to see,” said Ranu Dayal, a BCG senior partner and coauthor of the study. “We also see it in the big drop in Europe’s share of total global market cap—from 35 percent in 2007 to 23 percent in 2011—and in Asia-Pacific banks’ capturing almost 36 percent of global market cap. Although North America did a little better, gaining 3 percentage points of the aggregate market cap to corner a total of 27 percent in 2011, the overall global shift in value is unmistakable.”
It is not just an Asia-Pacific story: the BCG study reveals that Latin American banks’ market cap grew by 14 percent from 2007 through 2011, giving them another 3 percent of banks’ aggregate market cap worldwide. Latin America was the only region whose banks showed gains in absolute market cap.
“Emerging-nation banks are doing better for two simple reasons,” noted Dayal. “First, they are benefiting from the enormous numbers of customers and businesses who, for the first time in their lives, are starting to open bank accounts, take out loans, and participate in other banking interactions. Second, there’s a growing class of affluent and wealthy customers in those populations who help boost banking revenues.”
It’s not surprising that the value shift has rearranged the rankings of the world’s top banks. While the top 10 continue to be dominated by China and North America—each with 4 entries—banks from the euro zone are sliding off the list of the top 30. By 2011, there were only 2 euro-zone banks in the top 30, and just 5 European banks overall—2 from the U.K. and 1 from Switzerland.
Analyzing the results, BCG’s Lars-Uwe Luther, a partner and coauthor of the report, pointed to two significant findings. “You can see that single markets can be very viable,” he said. “Banks from Canada and Australia stood out for their performance in the top-bank rankings; they were 7 of the top 30 banks in 2011 compared with only 2 in 2007. That tells us that focusing on a strong and stable domestic market can be profitable, with good TSR.”
The second finding: the business model matters. Even in lackluster market environments, a business model such as transaction banking can become a TSR star. “Just look at Visa and MasterCard,” said Luther. “Both are oriented to stable revenue streams from payments and transactions, and both place high in the global rankings.”
Despite these bright spots, the overall report makes for gloomy reading. BCG found that the banking industry’s TSR fell precipitously in 2011. Its TSR of almost –20 percent was the second worst of ten industries surveyed—and 8.5 percentage points worse than the all-industry average. The sector’s TSRs slid an average 9.6 percent per year from 2007 through 2011, dropping more than 25 percent in the last year alone.
Again, emerging markets stood out for their relatively robust TSR performance from 2007 through 2011. Some are stand-outs: Indonesia’s banks boosted TSR by more than 20 percent a year in that time, while Mexico’s TSRs averaged 10 percent gains and India’s more than 6 percent. Relative is the operative word, though: in terms of shareholder returns, emerging markets were hardly free of pain. In the Asia-Pacific region, bank TSRs sank to –15 percent in 2011 while in Latin America they fell to –27 percent.
Globally, the sector’s profits were nothing to write home about either. The good news: in 2011, the industry’s after-tax ROE stabilized at about 10 percent. The bad news: the industry’s after-tax cost of equity, at nearly 14 percent in 2011, was far above ROE levels and still well above precrisis levels.
Those patterns were also reflected in the industry’s price-to-book ratios. Overall, they have slipped an average 18 percent a year since 2007. Again, the banks of rapidly developing countries present a very different picture. Indonesia, Mexico, and India show very high price-to-book ratios. Of the developed countries, only Canada and Australia are keeping pace. Italy, France, and the U.K. produced 2011’s worst price-to-book numbers.
To receive a copy of the analysis or to arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or firstname.lastname@example.org.