SOURCE: The Boston Consulting Group

The Boston Consulting Group

February 25, 2010 00:01 ET

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

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.

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