top 1000 world cover story

While European banks count the cost of the eurozone sovereign debt crisis, is leading the emerging markets into a new era of banking dominance. But the established markets of the US and Japan should not be forgotten. Philip Alexander reports.

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top 1000 world banks cover story

t will come as no surprise that 2011 was the year ABN Amro and WestLB. The latter will exit our table when the eurozone crisis dragged the global next year as an EU-mandated break-up plan is com- banking sector backwards. Assets and Tier 1 pleted, with the remaining core of the renamed capital in The Banker’s Top 1000 World Banks Portigon Financial Services. ranking continue to grow, although at a much The UK is by no means immune from the woes of Ireduced rate to last year’s ranking. But aggregate profits, the eurozone, and UK banks are hardly in better shape which had staged two years of recovery since the finan- overall. Total Tier 1 capital in the country actually cial crisis, reversed by 1%, to stay only just above the shrank in 2011, with Royal dropping $700bn mark. out of the top 10 banks worldwide. While total pre-tax The process of capital build-up demanded by regu- profits slipped far less than in the eurozone, by about lators in the wake of the crisis also appears to be 8.2%, Brazil has now overtaken the UK in terms of prof- approaching completion, as the aggregate capital-to- its earned, despite having an asset base that is less than assets ratio this year is almost exactly constant on last one-fifth the size of that in the UK. year, at 5.36%. The heaviest capital increases in previ- But the UK banking sector is itself a divided story. ous years had been among the top 25 banks, whereas the While Lloyds crashed back into losses due to its provi- change in the capital-to-assets ratio for those largest sioning for payment protection compensa- banks this year is in line with the Top 1000 as a whole, tion claims, two UK banks, HSBC and , were gaining just 0.1%. among the top 20 largest profits in the 2012 rankings. Last year, we asked the question about whether the Of course, both earn a significant part of their income performance of banks in the largest markets was sus- outside the UK, including HSBC’s universal banking tainable. In Europe at least, the answer this year is an operations across emerging markets, and Barclays’ US emphatic no. In total, 49 banks reversed from a profit in investment banking operations built up from its pur- 2010 to a loss in 2011, of which all but 13 are based in EU chase of the US arm of Lehman Brothers in 2008. countries. By contrast, only 14 banks worldwide fell from a profit to a loss in 2010. Of the 25 largest losses at Greek shockwave previously profitable banks, only one (Hudson City Ban- The cause of Europe’s troubles is well known. Greek corp in the US) comes from outside the EU. The scale of banks, together with the Cypriot banks whose Greek the damage is so severe that aggregate pre-tax profits in operations are larger than those in their home market, the eurozone were just $2.1bn, compared with $85.5bn feature prominently among the largest losses this year. in last year’s ranking. No less serious has been the gradual acknowledgement On a more positive note, 34 banks returned to profit of the damage caused to Spain’s cajas (savings banks) by after losing money in the previous ranking – compared the collapse of a domestic real estate bubble. with 105 banks in 2010. The US is the major success An EU bail-out package for Spanish banks was story, accounting for half the banks that have re-entered under negotiation at the time of going to press, and the profit as the clean-up from subprime makes progress. need for it is clear. The bank mergers driven through by But there are also some banks in western Europe that the authorities in 2011 cannot overcome the scale of the were synonymous with the first round of the financial losses. , Catalunya Caixa and Grupo Unnim all crisis but are now on the road to recovery, including disclosed losses equivalent to more than half their entire capital base, while Banco CAM, whose attempted merger with Liberbank failed last year, will need totally recapitalising. Simply plugging the holes left by loan Tier 1 capital-to-assets ratio losses will not be enough – any rescue plan will need to % by ranking year think hard about which banks have sufficient potential business to return to viability. Interestingly, while

5.4 5.35 Bankia’s operating income collapsed by more than 60% 5.36 in 2011, Catalunya Caixa actually increased its underly- ing revenues by almost 70%. 5.2 5.14 and Portugal are also heavy losers. But the damage at Italy’s two largest banks looks temporary – 5.0

4.8

4.62 Top 1000 Aggregates ($BN)

4.6 4.54 4.53 4.53 2011 2010 Change (previous year)

4.5 Tier 1 capital 5,746 5,434 5.7% (10.6%) 4.4 4.45 4.43 Total assets 107,233 101641 5.5% (6.4%) Pre-tax profits 702 709 -1.0% (77%) 4.32 Profits/Tier 1 12.23% 13.1% 4.2 Return on assets 0.66% 0.69% 02 03 04 05 06 07 08 09 10 11 12 Source: www.thebankerdatabase.com Source: www.thebankerdatabase.com

July 2012 | The Banker | 115 top 1000 world banks cover story

provided the EU is able to prevent Italy descending into Regions by total Tier 1/total a full-blown sovereign debt crisis. The losses come assets/total pre-tax profits 2011 mostly from one-off items, in particular extremely con- Country Tier 1 Assets Pre-tax profits servative goodwill write-offs on the value of past acqui- ($bn) ($bn) ($bn) sitions at home and to a lesser extent in central and US 1051.9 13,341.0 131.5 eastern Europe. has already offset much of its Eurozone 1721.6 40,895.0 2.1 loss with a rights issue staged in January 2012, while China 781.5 13,533.2 206.3 raised capital in 2011. Japan 600.9 13,075.5 60.0 Further afield, ’s rescue and dismemberment UK 440.8 9999.5 32.9 by the French and Belgian governments was triggered Brazil 123.8 1729.2 33.1 by its exposure to the eurozone periphery, while Erste Source: www.thebankerdatabase.com Group Bank suffered a much smaller loss after winding up a portfolio of credit default swaps written on - zone sovereigns. Its smaller peer Volksbank took a hit of E160m from its exposure to the Greek private sector Asset quality early warnings involvement (PSI) restructuring, and a far larger loss on With the collection of impairment data improving, the its operations in and . The latter were Top 1000 should provide an increasingly valuable early- part of its Volksbank International subsidiary sold to warning indicator for any deteriorations in asset quality. Russia’s Sberbank. Of course, impairment has a certain degree of discretion One of the largest losses caused by is entirely – banks do not always provision fully for non-perform- hidden in our ranking. Hypo Real Estate (HRE) in Ger- ing assets, and also choose whether to impair at-risk many returns to profit this year, for the first time since it assets. The long delays in disclosing the true level of was nationalised by the German government in 2009 on non-performing loans (NPLs) at Spanish banks are a account of catastrophic losses on US securitisation reminder that impairment figures may not always reveal assets. But ’s state financial support fund all that they should. But regulators worldwide are taking SoFFIN took a hit of E8.9bn on Greek government debt an increasingly tough line, giving banks less leeway to that was previously on HRE’s own balance sheet, which massage the true state of their portfolios. was transferred to its ‘’ vehicle FMS Wertman- We have tracked impairments as a percentage of agement for winding down in 2010. It is perhaps not total operating income, to give an indication of banks’ widely realised that the German taxpayer effectively ability to absorb the pain of impaired assets through participated in the restructuring of Greece’s debts to the their underlying revenues. Unsurprisingly, Greek, Cyp- private sector in March 2012. riot, Irish and Spanish banks all feature prominently.

25 Largest Losses from Previously 25 Largest profits from Previously Profitable Banks loss-making Banks Rank T1000 Bank Country Latest Rank T1000 Bank Country Latest rank profit ($m) rank profit ($m) 1 160 Greece -17,364 1 63 ABN Amro Group Netherlands 872.09 2 126 Dexia Belgium -15,127 2 144 Zions Bancorporation US 522.39 3 28 Intesa Sanpaolo Italy -12,428 3 231 77 Bank Japan 338.66 4 21 UniCredit Italy -9,998 4 128 Hypo Real Estate Holding Germany 332.53 5 239 Group Greece -9,674 5 361 Associated Banc Corp US 183.43 6 109 Banco Financiero y de Ahorros Group Spain -6,373 6 489 Cathay Bank US 151.41 7 187 Greece -6,123 7 68 Landesbank Baden Wurttemberg Germany 151.39 8 77 Banca Monte dei Paschi di Siena Italy -6,092 8 353 Hypo Alpe Adria Bank 109.46 9 18 UK -5,476 9 774 Pacwest Bancorp US 87.50 10 243 Popular Bank Cyprus -5,306 10 247 SNS Bank Netherlands 76.34 11 119 Dexia Bank Belgium (Belfius) Belgium -2,776 11 794 Boston Private Financial Holdings US 57.87 12 102 UBI Banca Italy -2,761 12 729 Western Alliance Bancorporation US 48.34 13 183 Catalunya Banc (CatalunyaCaixa) Spain -2,590 13 169 WestLB Germany 47.87 14 302 Cyprus -1,749 14 682 BBCN Bancorp US 42.78 15 153 Millennium bcp Portugal -1,581 15 676 First Midwest Bancorp US 41.07 16 212 Hudson City Bancorp US -1,255 16 656 Butterfield Bank Group Bermuda 40.40 17 273 Osterreichische Volksbanken Austria -1,153 17 543 Sterling Financial Corporation US 39.13 18 180 Banca Popolare di Milano Italy -901 18 778 Kita Nippon Bank Japan 37.95 19 394 Grupo Unnim Spain -733 19 931 CM Florida Holdings US 36.89 20 129 Caixa Geral de Depositos Portugal -693 20 779 Central Pacific Financial Corp US 36.57 21 312 WGZ Bank Germany -560 21 972 Ameris Bancorp US 31.65 22 277 Banco Portugues de Investimento (BPI) Portugal -424 22 933 Hanmi Financial Corporation US 28.88 23 75 Austria -417 23 800 Pinnacle Financial Partners US 28.50 24 924 Attica Bank Greece -323 24 991 Daito Bank Japan 23.60 25 420 Belarusbank Belarus -299 25 893 Sandnes Sparebank Norway 18.57 Source: www.thebankerdatabase.com Source: www.thebankerdatabase.com

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Top 10 Countries for Impairment Top 25 Impairments ranking Charges Rank T1000 Bank Country Impairments Rank Country Impairment (% of rank (% of operating total operating income) income) 1 Greece 302.13 1 243 Cyprus 433.62 2 Cyprus 242.48 2 160 National Bank of Greece Greece 348.17 3 Belgium 124.88 3 439 FIH Erhvervsbank Denmark 343.35 4 Ireland 121.61 4 186 Irish Bank Resolution Corporation Ireland 275.55 5 Slovenia 91.30 5 239 Piraeus Bank Group Greece 267.99 6 Belize 64.42 6 187 Alpha Bank Greece 262.59 7 Portugal 62.94 7 183 CatalunyaCaixa Spain 220.44 8 Spain 44.37 8 924 Attica Bank Greece 211.81 9 41.42 9 109 Banco Financiero y de Ahorros Spain 198.11 10 Angola 37.04 Group (Bankia) Source: www.thebankerdatabase.com 10 65 (AIB) Ireland 179.58 11 940 Abanka Vipa Slovenia 178.99 Lowest 10 Countries for Impairment 12 918 Southwest Bancorp US 149.75 Charges 13 302 Bank of Cyprus Cyprus 139.84 Rank Country Impairment (% of total operating income) 14 184 Osterreichische Volksbanken Austria 123.18 15 742 United Community Banks US 117.71 1 Iceland -0.83 16 886 Hypo Tirol 115.46 2 Switzerland 1.01 17 229 Irish Life & Permanent Ireland 112.70 3 Hong Kong 1.33 18 394 Grupo Unnim Spain 100.97 4 Japan 1.37 19 786 Nova Kreditna Banka Maribor dd Slovenia 88.61 5 Panama 3.42 20 153 Millennium bcp Portugal 85.03 6 Sweden 3.61 21 486 Nova Ljubljanska Banka (NLB) Slovenia 81.72 7 Bermuda 4.10 22 419 Commercial Bank of Kuwait Kuwait 77.30 8 Egypt 4.26 23 362 Ukreximbank Ukraine 71.62 9 Guatemala 4.64 24 909 Gorenjska Banka Slovenia 68.08 10 Finland 4.70 25 546 Banco Internacional do Funchal Portugal 66.58 Source: www.thebankerdatabase.com Source: www.thebankerdatabase.com

There are a few other less predictable developments. countries with the lowest rate of impairments to operat- Denmark’s FIH Erhvervsbank is already in discussion ing income, suggesting a very conservatively run bank- with the Danish authorities, having hived off its real ing sector that is not yet heavily exposed to lending into estate arm in February 2012 as part of a restructuring the real economy. plan. In general, Scandinavia is in excellent health, with Sweden and Finland both among the 10 countries with A new banking giant the lowest ratios of impairment to income. There may be plenty of pessimism in this year’s ranking, Slovenia is beginning to look like a forgotten crisis but we should not neglect the positive stories. The most on the fringes of the eurozone, with four of the country’s obvious and radical shift that we have been tracking for banks all among the top 25 impairments as a proportion the past few years is the rise of China, and its status in of total operating income. Only Greece, Cyprus, Ireland this year’s ranking is extraordinary. China now equals the and Belgium (on account of the Dexia crisis) are in a US in having four banks in the top 10 by Tier 1 capital, worse condition based on this indicator. and a Chinese bank has entered the top three worldwide Historically, poor asset quality used to be much for the first time, as ICBC displaces HSBC. more common in emerging than in developed markets. China ranks 10th in the world for return on capital, While we have long observed the steady improvement in with the nine countries ahead of it all being emerging the performance of emerging market banks, this is no markets. Chinese capital and assets are both rising very time for complacency. Several high-growth markets fast, at almost 28% for Tier 1, and more than 23% for have experienced sharp deteriorations in asset quality assets. The high return on capital is achieved on a capi- this year, including Brazil and Nigeria, where impair- tal-to-asset ratio of 5.8%, much healthier than western ments more than doubled, and Vietnam, where they Europe or Japan. more than tripled. In all three cases, total impairments While there are concerns about China’s real estate are still fairly low, at less than 20% of operating income, market, and whether arrears on corporate and municipal but a note of caution is clearly advisable if asset quality lending are adequately reported, Chinese banks appear to continues to slide at this pace. have a vast cushion of profits with which to tackle problem At the other end of the scale, there is perhaps hope loans as they arise. The scale of profits in China is one of for the eurozone from Iceland, where net impairments the most striking developments of the past five years. In were negative this year. Having been through the pain of our 2007 ranking (financial year ending 2006), the US, restructuring in 2008 and 2009, the rebuilt banking Middle East and Latin America were noticeable outper- sector is now writing back onto the balance sheet the formers in terms of profitability. North American banks recoveries from previously written-off loans. Despite the had a 15.9% share of global assets, but a 26.5% share of political turmoil in 2011, Egypt is also among the 10 profits. Western Europe was already an underper-

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Global share of assets, 2007 ranking Global share of profits, 2007 ranking

% %

I Western Europe I Western Europe I Asia-Pacific I North America I North America I Asia-Pacific I Middle East I Middle East I Latin America I Latin America I Central and Eastern Europe I Central and Eastern Europe I Africa I Africa Central and Eastern Europe includes Central Asia. Central and Eastern Europe includes Central Asia. Latin America includes the Caribbean. Latin America includes the Caribbean. Source: www.thebankerdatabase.com Source: www.thebankerdatabase.com

Global share of assets, 2012 ranking Global share of profits, 2012 ranking

% %

I Western Europe I Asia-Pacific I Asia-Pacific I North America I North America I Latin America I Latin America I Western Europe I Middle East I Middle East I Central and Eastern Europe I Central and Eastern Europe I Africa I Africa Central and Eastern Europe includes Central Asia. Central and Eastern Europe includes Central Asia. Latin America includes the Caribbean. Latin America includes the Caribbean. Source: www.thebankerdatabase.com Source: www.thebankerdatabase.com

former, with a huge 58.3% share of assets but only 46.2% emerging markets. Brazil’s ratio is more than 7%, those of profits. But Asia-Pacific was also punching below its for Mexico and Russia are more than 8%, and Indonesia weight, with 21.9% of assets but only 18.9% of profits. and Turkey are pushing 9%. Roll forward to the 2012 ranking, based on end-2011 results (or March 2012 for most Japanese banks), and Going where the growth is most asset shares are constant. The exception is that Asia- That note of caution notwithstanding, it is very clear that Pacific has grown to 33.5%, entirely at the expense of emerging market growth prospects will be superior to western Europe, now down to 45%. But in terms of prof- those in western Europe for some time. The top 25 coun- its, western Europe has almost disappeared, with a share tries for return on capital are all emerging markets, with of just 6.3%, while Asia-Pacific now accounts for a stag- the exception of commodity-driven economies in Aus- gering 53.9%. China’s profits are 30% of the global total, tralia and . compared with assets that are just 13%. But this is not However, before European executives rush for the air- solely a Chinese story, with Indonesia accounting for only port, they will notice that many of the top countries for 2.5% of assets worldwide, but more than 10% of profits. return on capital are not easy markets in which to operate. Of course, it pays to be cautious, and while China’s Banking penetration may be low, allowing high margins capital-to-assets ratio is high by developed market and room for growth, but it is low for a reason. Pakistan, standards, it is significantly lower than other major which slips a little from its top spot but is still the fourth

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Bank accounting for Greek sovereign restructuring Bank Date Country Pro forma Capital injection/funding commitment included in Current PSI Greek Statutory Current PSI % haircut Tier 1 ($m) pro forma Tier 11 year’s loss impairment sovereign Tier 1 ($m) year’s loss impairment included included or included or debt % hair- included or included or in Tier 1 not? not? cut included not? not? calculation in Tier 1 calculation greece EFG (EFG Group)2 12/11 Greece 6479 n/a 2 Not Not n/a n/a n/a n/a n/a included included National Bank of Greece 12/11 Greece 5965 $8.928bn from HFSF3 Included Included 80% -3074 Included Included 80% Alpha Bank 12/11 Greece 4884 $2.458bn from HFSF Included Included 79% 2426 Included Included 79% Piraeus Bank Group 12/11 Greece 3368 $6.017bn from HFSF Included Included 76.5% -2650 Included Included 76.5% Emporiki Bank (Crédit Agricole) 12/11 Greece n/a n/a n/a n/a n/a 1625 Included Included 77% Attica Bank 12/11 Greece n/a n/a n/a n/a n/a 368 Included Included 71.6% Cyprus Cyprus Popular Bank 12/11 Cyprus 3284 $2.329bn rights issue underwritten by the Included Included 76.4% 7784 Included Included 76.4% Republic of Cyprus plus $160m Tier II exchange to create core capital plus $84m existing eligible contingent convertible bonds Bank of Cyprus 12/11 Cyprus 25995 $207m share capital increase (rights issue) and Included Included 83% 2392 Included Included 83% $559m exchange of Convertible Enhanced Capital Securities (CECS), completed in March 2012 12/11 Cyprus n/a n/a n/a n/a n/a 703 Included Included 70% 1Amount of capital injection included in calculation of pro-forma Tier 1 capital. Actual recapitalisations may vary. 2EFG Eurobank Ergasias statutory Tier 1 capital not disclosed. Shareholders’ equity, including 2011 losses, was $1.13bn at Dec 31, 2011. 3National Bank of Greece received a higher amount of HFSF bonds totalling $9.61bn on May 28, 2012. 4Cyprus Popular Bank Tier 1 capital based on total shareholders equity, actual figure not disclosed. 5Bank of Cyprus’s pro-forma Tier 1 capital calculation does not include PSI impairment related tax benefit of $299m recorded in Q1 2012. Key: HFSF – Hellenic Financial Stability Fund; PSI – private sector involvement (Greek sovereign debt restructuring).

best performer, is fraught with political and operational the top earning foreign subsidiaries, which contributed risks, which have kept the banking sector very small com- almost 70% of group pre-tax profits, while Spanish peer pared with the size of the domestic population. BBVA’s holdings in Mexico and Venezuela comprised Argentina, which jumps from fifth to top of the more than 60% of its profits. BBVA also has a 25% stake return on capital ranking, suffers from entrenched high in highly successful Turkish bank Garanti. Italy’s Uni- inflation, which policy-makers appear unwilling to Credit is another to benefit from a Turkish subsidiary, tackle. Asset growth of more than 50% in 2010 looked Yapi Kredi, while profits from UniCredit in Russia are unsustainable, even from a low base, but this has at least just outside the top 25 for foreign-owned subsidiaries. moderated to just 12.3% in 2011 without doing profits Of course, control of Turkish Finansbank is also a saving any harm. That should provide reassurance that Argen- grace for National Bank of Greece, whose home market tine banks are not pushing too far into high-risk lending is a source of catastrophic losses at the moment. activities, but slower asset growth would presumably also constrain revenue growth in the future. Emerging banks cross borders Perhaps the stand-out story is Poland, the only This last story, however, is a stark reminder that foreign country among the top 25 by return on capital to com- acquisitions are not an option for the worst-hit banks bine a highly profitable banking sector with the relative that are now desperately short of capital. Indeed, the institutional security of EU membership (but thankfully trend is heading the other way, as banks in western not eurozone membership). Little wonder that Banco Europe are forced to sell subsidiaries as part of state- Santander, with its home market in trouble, bought the backed restructuring plans. Russia’s Sberbank has been country’s fourth largest bank, Bank Zachodni WBK, a prime beneficiary of this, buying the central and east- from Allied Irish Banks in 2010. It then followed up by ern European network of Austria’s Volksbank in 2011, merging Zachodni with Kredyt Bank, owned by Bel- and now closing in on the acquisition of DenizBank in gium’s KBC, in May 2012, to build the country’s third Turkey from Belgium’s rescued Dexia. largest bank. Indeed, Europe’s woes are a unique opportunity for In fact, ownership of foreign assets is already a the most successful banks in emerging markets that are major advantage for many European banking groups, in danger of outgrowing their home market to pursue a including those with some of the most troubled home more cross-border strategy. In addition to Sberbank, jurisdictions. In our table of top profits among foreign- Latin American banks appear to be on the rise, with owned subsidiaries, we have excluded banks in Aus- Chile’s Corpbanca buying Santander’s Colombian oper- tralia, New Zealand and Scandinavia, which effectively ations. HSBC announced sales of several Latin Ameri- have multiple home markets. The top foreign subsidi- can units during 2012, all to Colombian banks – Colombia, ary, HSBC Hong Kong, is also almost a second home for Peru, Uruguay and Paraguay to GNB Sudameris, with the UK-headquartered bank, whose very name high- Costa Rica, El Salvador and Honduras going to Banco lights its historic role in Asian markets. Davivienda. Of course, both HSBC and Santander retain By contrast, other important foreign acquisitions vast international networks, so these sales are about are much more recent. Santander in particular has a rationalisation rather than retreat. string of very profitable banks in Latin America among In general, smaller banks are now increasing

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Top 25 Countries for Return on Top 25 Profits for Foreign-Owned Capital (%) Subsidiaries Rank Country Return on capital Rank Bank Country Pre-tax Parent Parent profits ($m) country 1 Argentina 42.82 1 HSBC Hong Kong 11,766 HSBC UK 2 Peru 40.41 2 Brasil Brazil 4752 Banco Santander Spain 3 Indonesia 36.08 3 Grupo Financiero BBVA Mexico 2207 BBVA Spain 4 Pakistan 35.96 Bancomer 5 Russia 30.46 4 Santander Holdings USA US 2166 Banco Santander Spain 6 Poland 29.89 5 HypoVereinsbank Germany 2089 UniCredit Italy 7 28.02 6 Santander UK UK 1949 Banco Santander Spain 8 Vietnam 27.35 7 Absa Group South Africa 1745 Barclays UK 9 Brazil 26.74 8 Yapi ve Kredi Bankasi Turkey 1540 UniCredit Italy 10 China 26.39 9 Grupo Financiero Banamex Mexico 1470 Citi US 11 Venezuela 25.97 10 Bank Hong Kong 1282 Standard Chartered UK 12 25.31 (HK) 13 Morocco 24.39 11 Grupo Financiero Santander Mexico 1171 Banco Santander Spain 14 Turkey 23.72 12 UnionBanCal Corp US 1095 Bank of Tokyo- Japan 15 Malaysia 23.33 Mitsubishi UFJ 16 Thailand 23.17 13 Bank Pekao Poland 1051 Unicredit Italy 17 Chile 22.80 14 HSBC Bank Brasil Brazil 1020 HSBC UK 18 Iran 22.75 15 Banco Santander Chile Chile 1003 Banco Santander Spain 19 Qatar 22.39 16 Banco de Chile 965 Citi US 20 Colombia 22.38 17 HSBC Bank Canada Canada 936 HSBC UK 21 Canada 20.75 18 Ceska Sporitelna Czech Rep 856 Erste Group Bank Austria 22 Mexico 20.6 19 BancWest Corporation US 805 BNP Paribas France 23 India 20.59 20 Citizens Financial Group US 778 RBS UK 24 Lebanon 20.37 21 BBVA Banco Provincial Venezuela 747 BBVA Spain 25 Panama 18.96 22 Standard Chartered Bank India 699 Standard Chartered UK India Source: www.thebankerdatabase.com 23 DenizBank Turkey 659 Dexia/Sberbank Belgium/ Russia 24 Bank Austria Austria 658 UniCredit Italy 25 CSOB Czech Republic Czech Rep 650 KBC Group Belgium Source: www.thebankerdatabase.com

their capital more rapidly than the average for the Top quality. The good news is that many central and eastern 1000. While global capital rose 5.7%, the threshold for European subsidiaries are generating operational prof- entry into the ranking, at $284m in Tier 1 capital, its, and should start to yield greater value for their par- increased more than 11%. This would suggest that the ents in the future. shift in the global banking landscape toward regional In the Baltic states that were severely hit by the emerging market players is set to continue. financial crisis and a local property collapse in 2008, subsidiaries of Sweden’s SEB and have Not much goodwill returned to profit. One bank with a less certain future is However, foreign subsidiaries do not always bring prof- Ukrsibbank, BNP Paribas’s subsidiary in Ukraine. The its. In central and eastern Europe especially, a combina- bank lost $448m in 2011, equivalent to almost 70% of tion of the economic fall-out from the eurozone and local its Tier 1 capital, and is now too small to appear in our political risks have triggered significant losses at the par- country ranking unless recapitalised by its parent. It ent company level. Erste Bank, Volksbank, UniCredit goes without saying the Greek subsidiaries are hardly in and Intesa Sanpaolo have all taken substantial write- favour either, with Crédit Agricole’s Emporiki Bank los- downs on operations in Romania, Hungary and (in the ing more than $2bn in 2011, despite which the group case of UniCredit) Ukraine. still managed to generate overall profits of $5.1bn. These are not necessarily the product of loan losses, but rather because the banks had been carrying signifi- Don’t forget established markets cant goodwill valuations dating from their acquisitions For all the focus on growth markets, it is noticeable that of these subsidiaries. Under increasing scrutiny from countries at the epicentre of the 2008 financial crisis, regulators, all these banks had acknowledged that the namely the US and UK, can still generate handy returns prospects for these subsidiaries were insufficient to jus- for foreign investors. Santander subsidiaries in the US and tify the high goodwill values. UK each generated profits of about $2bn last year, while Such write-offs are at least one-off losses – espe- US subsidiaries contributed about $800m each to Royal cially for Volksbank, which has now sold its Hungarian Bank of Scotland and BNP Paribas. Overall, the US mar- operations to Sberbank. Worryingly, the bank was ket has returned to its pre-crisis status as an outperformer forced to retain its Romanian subsidiary, which the in terms of profitability, with a 15.6% share of global assets Russian bank refused to buy owing to fears over asset generating a 23.4% share of worldwide profits.

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Mergers, acquisitions and restructurings Bank Country Tier 1 cap in previous ranking $m Notes During 2011, change included in 2012 ranking Banco Base Spain 7223 Merger failed, Liberbank Group & Banco CAM separated Germany 7194 Acquired by Bank of Moscow Russia 4942 Acquired by VTB Bank Marshall & Ilsley Corp US 4430 Acquired by BMO Spain 2616 Merged – see Banco Popular Espanol EON Bank Malaysia 1341 Acquired by Hong Leon Bank Deutsche Schiffsbank Germany 1257 Acquired by BAC Credomatic Panama 930 Acquired by Banco de Bogota NewAlliance Bancshares US 917 Acquired by First Niagara Friesland Bank Netherland 767 Acquired by Bank Islam Malaysia Malaysia 669 Acquired by BIMB Holdings Wilmington Trust Corp US 648 Acquired by M&T Bank Corporation Caja Cantabria Spain 521 Merged into Liberbank Group Sterling Bancshares US 509 Aquired by Comerica Compagnie Financiere E de Rothschild France 429 Group reorganisation – see Banque Privee Edmond de Rothschild Group Novacaixagalicia Spain 372 Renamed NCG Banco Center Financial Corporation US 291 See BBCN Bancorp Danvers Bancorp US 283 Acquired by People’s United Financial Rural Bank Australia 270 Acquired by Bendigo and Adelaide Bank During 2012, change not included in ranking Kuxtabank Spain 7394 (estimated) Merger of BBK, Kuxta and Vital Banca Civica Spain 6129 Acquired by CaixaBank Banco Cam Spain 3178 Acquired by PT Bank Danamon Indonesia Indonesia 2376 Bid for acquisition from DBS Group Holdings DenizBank Turkey 1930 Acquired by Sberbank Russia Pacific Capital Bancorp US 715 Acquired by Mitsubishi UFJ Financial Group Kredyt Bank Poland 696 Merged with Bank Zachodni WBK Source: The Banker, Dealogic

Another banking market that is perhaps easily for- Accounting for a crisis gotten is the former giant of Japan, whose banks domi- In addition to generating heavy losses, the eurozone sov- nated the top 10 two decades ago. In this year’s ranking, ereign crisis has also provided some interesting dilem- only Mitsubishi UFJ retains that status, with Mizuho mas for our research team. During the 1980s, US and Sumitomo Mitsui squeezing into the top 20. regulators responded to signs of growing trouble in the With a capital-to-assets ratio of 4.6%, they do not savings and loan sector by loosening accounting stand- have a huge proportion of surplus capital. But Japanese ards in an attempt to give these banks time to trade their banks did record impairments equivalent to just 1.4% way out of trouble. of total operating income in 2011, despite the damage In many cases, the ploy failed badly as losses only done to the local economy by the earthquake and tsu- increased, and it is perhaps worrying that the European nami in March. This has helped Japanese banks in the Banking Authority (EBA) seems to be straying down the 2012 Top 1000 to show profits of $60bn, double those same route in a bid to shore up Europe’s banking sector. of the UK and up almost 33% year on year. The improv- Not all Greek and Cypriot bank data submitted to the Top ing performance after the stagnation that followed 1000 appeared to take full account of the losses suffered Japan’s own financial crisis in the early 1990s holds out on Greek sovereign debt, which prompted us to request hope to western Europe. that these banks fill in an additional survey to explain The strong savings culture in Japan means its banks their results. The responses to that survey can be found on are also highly liquid, with the top three banks all enjoy- page 122, and the crucial message is that the Greek banks ing loan-to-deposit ratios of well below 90%. In fact, the submitted their capital ratios on a pro-forma basis, incor- major challenge for Japanese banks is a shortage of new porating the capital injections they expected to receive lending opportunities in their home country, as the pop- from the EU as part of the country’s rescue package. ulation dwindles and economic growth remains low. The Hellenic Financial Stability Fund began the This makes them natural candidates to expand over- capital injection in May 2012, but its completion is still seas, and there are signs of movement down that route. subject to political uncertainty in the wake of elections In the US, Mitsubishi is using UnionBanCal, a subsidi- in June and the incoming government’s intention to ary since 1975, to take advantage of the post-crisis land- partially renegotiate terms with the EU. In the case of scape and acquire further assets on the west coast, Cyprus, the government is underwriting a $2.3bn rights including two banks in 2010 and Pacific Capital Ban - issue by Cyprus Popular Bank, but at the time of going to corp in 2012. UnionBanCal generated profits of more press the Cypriot authorities had indicated that they than $1bn in 2011. would need EU support to carry this through.

128 | The Banker | July 2012 top 1000 world banks cover story

Top 10 Increases in Market Risk Top 10 decreases in Market Risk Rank Bank Country % increase Total RWA Rank Bank Country % decrease Total RWA in market RWA change % in market RWA change % 1 Banco Bradesco Brazil 355.64 11.95 1 Allied Irish Banks (AIB) Ireland -63.72 -17.41 2 BNP Paribas France 261.95 -1.1 2 Ireland -44.71 -17.8 3 UniCredit Italy 240.38 -2.04 3 Scotiabank Canada -42.4 11.35 4 Australia 233.92 0.08 4 Banco Santander Spain -34.16 -9.44 5 Crédit Agricole France 218.42 1.76 5 Woori Financial Group South Korea -22.22 3.27 6 Deutsche Bank Germany 178.55 6.67 6 UK -20.96 7.84 7 Banco do Brasil Brazil 158.74 8.88 7 Royal Bank of Canada Canada -12.01 5.22 8 Rabobank Group Netherlands 151.87 -1.43 8 Desjardins Group Canada -9.35 3.06 9 Société Générale France 140.78 0.97 9 KDB Financial Group South Korea -7.77 12.08 10 UBS Switzerland 136.36 21.05 10 Nationwide Building Society UK -6.04 -0.38 RWA – risk-weighted assets RWA – risk-weighted assets Source: www.thebankerdatabase.com Source: www.thebankerdatabase.com

What is also striking across the board is that the savings banks, the sparkassen. We have mentioned in haircuts applied on Greek sovereign debt holdings, and the past that data submission from this sector is the way that they have been applied, are not at all uni- extremely patchy, and this year we adopted a new form across the Greek and Cypriot banks. This begs the approach, simply including the aggregate figures for the question of whether some banks have given themselves whole sector supplied to us by the German Savings Bank a sufficient safety margin in their capital-raising plans, Association (DSGV) in the Germany country listing. especially as the real economy is also likely to remain in The DSGV justifies this method of reporting because the doldrums for some time. there is a mutual guarantee on all its members, so depos- Clearly, there will be similar concerns about its in any single bank are safe as long as the association accounting at the Spanish cajas (savings banks), which as a whole is solvent. Our response would be that most took several years to acknowledge the scale of losses suf- sparkassen are ultimately owned by municipal taxpay- fered. Several cajas do not report NPLs to the Top 1000 ers, who should surely have a right to know whether at all, while others are recording levels of about 3%. By their local savings bank is performing adequately or not. contrast, some of the banks already subject to heavier official intervention and rescue by the government Tightening the rules restructuring fund FROB, such as Liberbank and Banco While accounting standards may be slipping, capital reg- CAM, have disclosed NPL ratios well into double fig- ulation is set to tighten up with the advent of Basel III. ures. This implies there could be further losses to come Much has been made of the impact that this will have on in the Spanish banking sector. In theory, allowing banks the weighting of market risk, which was allegedly under- to book expected future rescue packages in their capital estimated using Basel II methodology. is intended to reassure depositors, but the Spanish expe- As European banks gradually switch methodology rience suggests that opaque accounting merely increases in reporting their accounts, those with large derivatives mistrust in the financial sector as a whole. businesses, such as the three largest French banks, Another complicated accounting story is Dexia, Deutsche Bank and UBS, have all seen sharp rises in which was broken into French and Belgian components market risk-weighted assets. Brazil has also begun to as part of its 2011 bail-out. Losses on eurozone debt move to more rigorous capital rules, with two Brazilian exposure have only been partially recognised, and banks high on the list of increased market risk-weights. the capital ratio still includes money expected to be By contrast, banks restructured after the crisis that generated by the sale of more valuable assets. The have been on a steady deleveraging process have reduced DenizBank deal suggests those expectations may be market risk exposure substantially, including the Irish realistic, but market conditions for selling bank assets banks and the UK’s Royal Bank of Scotland. But for all are hardly favourable. the concerns on the trading floor, it is noticeable that We naturally favour financial transparency, and market risk is still a very small component of total risk- would note the correlation between financial problems weighted assets. Hence banks such as BNP Paribas and and the non-submission of data to the Top 1000. Last UniCredit can record large increases in market risk, but year, Bank of Moscow did not submit data. After it was still lower their total risk-weighted assets. Given the bought by Russian peer VTB Bank in 2011, the combined impact that financial market volatility has been having on group required a government capital injection of more bank results, it is open to question whether even Basel III than $14bn to cope with losses on Bank of Moscow’s loan is yet able to capture the true levels of market risk on the book. This year, EFG Group, the parent balance sheets of the most complex banking groups. company of Greece’s Eurobank, has not submitted group- level data, although we have obtained some data for the The research for The Banker’s Top 1000 rankings was Greek subsidiary. Readers may want to take a closer look carried out by Adrian Buchanan, Guillaume Hingel, at the list of banks that did not submit data on page 258. Charles Piggott, Valeriya Yakutovich, Alberto Berardi One of the most notable omissions is the German and Bart Thomas.

130 | The Banker | July 2012