The Financial Crisis Has Slashed the Banking Industry's Market Value by $5.5 Trillion -- Equivalent to 10 Percent of Global GDP -- Says The Boston Consulting Group
A New Financial World Order Will See a Return to Traditional Banking, the Rise of Multilocals, and the Decline of Global Titans
| Source: The Boston Consulting Group
BOSTON, MA--(Marketwire - February 18, 2009) - The world's banks have seen their overall market
value plummet by $5.5 trillion since the start of the financial crisis,
according to a report published today by The Boston Consulting Group (BCG).
The losses, equivalent to 10 percent of global GDP, have precipitated a
radical restructuring of the world financial order and the rapid decline of
the global titans. Only four banks had market values greater than $100
billion at the end of 2008 -- ICBC, China Construction Bank, JPMorgan
Chase, and HSBC -- compared to 11 at the end of 2007.
In the report, "Living with New Realities," the seventh in the annual
Creating Value in Banking series, BCG found that the banking industry's
market value fell from $8.8 trillion in the third quarter of 2007 to $4.0
trillion by the end of 2008. It fell by a further $700 billion in the first
three weeks of this year.
The market value of the 30 largest banks, measured by market
capitalization, dropped from $3.2 trillion in 2007 to $1.7 trillion in 2008
-- a decline of about 47 percent. ICBC remains the largest bank in the
world, measured by market capitalization -- although its value fell by
nearly half, from about $339 billion in 2007 to about $174 billion in 2008.
Several large banks gained ground in the rankings. JPMorgan Chase rose from
seventh to third, forcing HSBC, previously the biggest non-Chinese bank,
into fourth position in the world rankings. Two banks leapt into the top
10: Wells Fargo, at 6 (up from 11 last year), and BBVA, at 10 (up from 15).
The major losses, together with the transformation in the world financial
order, will force companies to rethink how they do business -- but that is
not uniformly bad news. "There is going to be a 'new normal' -- a more
difficult, challenging environment for financial institutions, which will
persist for a considerable time," said Lars-Uwe Luther, a BCG partner and
one of the report's authors. "But the crisis will prove to be as
transformative as it is destructive."
In the report, BCG identifies several new realities that will redefine what
banks must do to compete and to win:
-- The new era will see the renaissance of the much-maligned universal
bank, which will offer a mixture of services to retail and corporate
customers. The fundamentals of the model remain sound -- these banks are
built on strong customer relationships, and they are funded predominantly
from their own deposit base.
-- "Focus" will be the watchword for bankers. Large banks will still
prosper, but not in the form of overly complex global banking titans, which
sought to do just about everything everywhere. In the postcrisis world,
banks will have to do fewer things -- and do them very well. In the future,
large banks will be "multilocal," concentrating on a smaller set of
activities in a more limited number of markets. Around the world,
governments and regulators will resist the creation of institutions that
are too big to save.
-- Traditional "old-fashioned" banking will reemerge as the preferred
business model, reflecting a more cautious, highly regulated, risk-oriented
environment. Customer relationships will take the place of innovative and
risk-taking activities as the centerpiece of banking strategy.
-- Deposits will be of paramount importance -- not innovative products.
Although securitization will not vanish, banks will concentrate on basic
products as they focus on generating new deposits -- the lifeblood of their
business. They have learned the lesson that their modern financial wizards
were no more able to turn lead into gold than the alchemists of old.
The crisis is not the end of opportunity. "The new realities will force
many banks to fall back on core businesses and markets, as well as leaner
cost structures," said John Garabedian, a BCG senior partner and coauthor.
"These actions -- coupled with better risk management -- should help
position a bank to gain substantial ground at the expense of competitors
that do not act quickly and with purpose."
The Impact of the Crisis Varies by Business
The financial crisis has different strategic implications for different
businesses:
-- Retail Banking. The battle for deposits may determine the fate of
entire financial institutions. Quality assets and strong branch networks
are also essential.
-- Corporate Banking. A steep increase in corporate loan losses will force
corporate banks to refocus on fundamentals such as pricing and
productivity.
-- Investment Banking. Investment banks are radically altering their
business portfolios. Many will move from being risk takers to trade
facilitators.
-- Asset Management. Asset managers are facing a massive withdrawal of
funds. They need to focus on cutting costs and rebuilding trust.
-- Wealth Management. Wealth managers avoided the most severe effects of
the crisis but face challenges that are the result of slumping economies
and damage to brands and trust.
Banking Performance Was Dismal in 2008
The crisis, by more than halving the industry's market value in 2008,
effectively wiped out all of the gains made since 2003.
The crisis took a heavy toll in the second half of 2008. The banking
industry's market value fell by a staggering $2.5 trillion in the space of
six months. In September, it became clear that the crisis was going to be
extraordinary. The month began with the government bailout of Fannie Mae
and Freddie Mac and ended with the collapse of Washington Mutual -- the
largest bank failure in U.S. history.
Other measures of value creation underscore the depth of the crisis:
-- The industry's total shareholder return (TSR), which includes capital
gains and free-cash-flow yields, fell to -53.6 percent in 2008 -- nearly 80
percentage points lower than it had been in 2006.
-- Average banking TSRs were steeply negative in all markets. In North
America, the average banking TSR was -50.7 percent. In Western Europe, it
fell by nearly 58 percentage points, to -60.5 percent. Among the BRIC
countries -- Brazil, Russia, India, and China -- the average banking TSR
plunged by more than 100 percentage points, to -54.4 percent.
To receive a copy of the report or to 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
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