SOURCE: The Boston Consulting Group

The Boston Consulting Group

February 18, 2009 00:01 ET

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

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

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