Zhou Qiong (Senior Financial Practitioner)
In 1970, the British "Banker" magazine began to publish a list of 300 of the world's largest banks, ranking the asset size at the end of the year. The expansion to 500 in 1980 and to 1,000 in 1990 and the change to Tier 1 capital reflect the increased emphasis placed on capital in the banking sector after the release of Basel I in 1988.
The size of thousands of large banks has grown and the regional distribution has changed
The assets of global banks have expanded considerably. The world's largest bank in terms of assets was Bank of America in 1970 with assets of $25.6 billion; in 2021, Industrial and Commercial Bank of China (ICBC) had assets of $5.11 trillion, 200 times that of Bank of America in 1970. Global GDP in 2020 is only 29 times what it was in 1970 at its current price. After the 2008 financial crisis, due to the improvement of the capital standard of banks, although the total assets and pre-tax profits of thousands of large banks have grown negatively in individual years, Tier 1 capital has maintained growth year by year, as shown in Figures 1 and 2. The average Tier 1 capital/asset rose from 5.15% in 2010 to 6.87% in 2020 and slightly decreased to 6.67% in 2021. In 2020, although the banking industry was hit by the new crown epidemic, its overall performance was far better than that of the 2008 financial crisis, and it strongly supported the real economy.
Figure 1: Total assets and pre-tax profit of 1,000 large banks
(Note: The year of 1,000 large banks is the year of release, and the data is the number of the previous year.) Source: the banker, same below)
Figure 2: Tier 1 capital of a thousand large banks
From the perspective of the total asset size of thousands of large banks and the growth rate of global GDP (for the convenience of comparing with GDP, the data of thousands of large banks in this paragraph is the actual number of years. The other paragraph years are all release years, the data is the number of previous years), from 2008 to 2019, the average growth rate of the asset size of thousands of large banks was lower than the GDP growth rate, and the ratio of total assets of thousands of large banks to global GDP fell from 159% in 2007 to 146% in 2019. In 2009, affected by the financial crisis, the assets of thousands of large banks and global GDP were negative. However, in 2020, affected by the epidemic, the global GDP negative growth (-3.3%), in order to alleviate the impact of the epidemic on the economy, countries have adopted a loose monetary and credit policy, the asset growth rate of thousands of large banks is as high as 16%, and the ratio of total assets of thousands of large banks to global GDP has risen to 175%, as shown in Figure 3.
Figure 3: Assets of 1,000 large banks and global GDP
The change in pre-tax profits more clearly reflects the impact of the epidemic. In 2021, thousands of large banks will have negative pre-tax profit growth (average -19.2%), average roc (pre-tax profit/tier 1 capital) to 9.44% (13.18% in 2020), and roa to 0.51% (0.72% in 2020), the lowest level since 2009. However, this is largely affected by the provision for provisions. In 2021, the provisions of thousands of large banks increased by 26% year-on-year, with the United States growing the most at 106.1%, Banks in the Asia-Pacific region increasing by 25% year-on-year, and European banks increasing by only 17%.
Changes in the country distribution of the world's top 10 banks. When the 1970 list was first introduced, the U.S. banking industry was leading, with 7 of the top 10 banks, 2 in the U.K., and 1 in Italy. In 1980, there were 7 in Europe, 2 in the United States and 1 in Japan. Among them, there are 4 in France, namely the French Agricultural Credit Bank, the French-Pakistani Bank, the Lyon Credit Bank, and the French Industrial Bank, which were state-owned at that time, with low capital adequacy ratio and profitability, and the French bank's hegemony time was very short. In 1990, there were 6 in Japan, 2 in the United Kingdom, and 1 each in France and Germany. From 1985 to the early 1990s, in 2000, there were 3 in the United States, 4 in Japan, and 1 each in the United Kingdom, France and China, but The profitability of Japanese banks was far inferior to that of the United States. In 2010, there were 4 companies in the United States, 3 in the United Kingdom, and 1 each in China, France and Spain. In 2020 and 2021, there will be 4 each in China and the United States, and 1 each in the United Kingdom and Japan.
Distribution of banks by region. The comparison of global economic strength has shown a trend of "rising in the east and falling in the west" in recent years, which is also evident in the changes in the regional distribution of the listed banks. In 1990, there were 222, 444 and 8 banks in the United States, Europe and China, respectively, and in 2021, they became 178, 262 and 144 respectively. In 2006, the profits of the banks in the United States, Europe and Asia accounted for 27%, 43% and 20% respectively, and in 2019, they became 27%, 21% and 42%. In 2021, the pre-tax profits of banks in the United States, the euro area, China and Japan accounted for 18.5%, 6.5%, 37.2% and 4.3% respectively.
Since 2000, the number of china's listed banks and the proportion of Tier 1 capital among the thousands of large banks have gradually increased. In 1990, 2000, 2010 and 2020, there were 8, 9, 84 and 143 banks on the list in China, respectively. In 2021, there will be 144 banks in China and 178 in the United States.
The combined Tier 1 capital of China's listed banks surpassed Germany in 2008, the United Kingdom in 2009, Japan in 2010 and the United States in 2014. In 2001, 2011 and 2021, the tier 1 capital of China's listed banks accounted for 5%, 11% and 30% of the thousands of large banks, respectively.
In 2009, as European and American banks suffered a sharp decline in profits from the global financial crisis, China's pre-tax profits accounted for a record 73.5% of the thousand major banks. 28.5% in 2020. In 2021, as China's economy took the lead in recovering from the impact of the epidemic, the banking industry was relatively little affected by the epidemic, and the proportion of pre-tax profits of China's listed banks increased to 37.2%, as detailed in Table 1 and Table 2.
Table 1: The proportion of Tier 1 capital, assets and profits of China's listed banks among 1,000 large banks (unit: %)
(Unit: %)
Table 2: Proportion of Tier 1 capital, assets and profits of 1,000 major banks in key distribution areas (unit: %)
Profitability of the listed banks by region. In general, the financial supply in economically underdeveloped areas such as Africa is insufficient, the bank spread is higher, and the profitability is stronger. Developed countries have abundant financial supply and relatively low bank spreads, resulting in weaker bank profitability. The Asia-Pacific region and China are somewhere in between. However, there are quite different countries between developed countries: the bank spreads of the United States and Canada are higher than those of ROA and ROE, while those of Western Europe and Japan are lower, as shown in Table 3.
Table 3 Profitability of Banks listed by 1,000 major banks by region (unit: %)
Revelation one: the relationship between banks and national economic strength from the evolution of rankings
From the perspective of the top banks in the list of thousands of large banks and their countries, the banks in Europe in the 1980s and Japan in the 1990s had a period of glory, but the banking list in the United States has been more durable, and the list has gradually become a Sino-US "championship" in the past decade.
In 1970, the 1st, 2nd and 3rd places in the global banking industry were Bank of America, First National Bank (the predecessor of Citigroup), chase Manhattan Bank (the predecessor of JPMorgan Chase); in 2000, the 1st, 2nd and 3rd places were Citigroup, JPMorgan Chase and Bank of America; in 2013, ICBC became the 1st place on the list for the first time and remained to this day; from 2018 to 2021, the four major banks in China (ICBC, CCB, ABC, and BOC) ranked in the top 4 of the list, and in 2021, The four largest U.S. banks (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo) ranked 5th, 6th, 7th and 9th. In 2002, Citigroup's Tier 1 capital, total assets and pre-tax profit ranked first, accounting for 6.1% of the thousand large banks and 30 times that of ICBC; from 2018 to 2020, ICBC's pre-tax profit accounted for nearly 5% of the thousand large banks, which was 2.3 times that of Citi; in 2021, ICBC's pre-tax profit accounted for 6.4% of the pre-tax profit of thousands of large banks, which was 4.3 times that of Citi.
The strength of a country's banks is often a reflection of the strength of the country's economy. However, the two are not completely proportional, but also related to the country's financing structure is mainly direct financing or indirect financing, macro leverage ratio, the degree of internationalization of banks and other factors. Taking the 2021 list as an example, among the top 20 banks, There are 9 in China, 5 in the United States, 2 in Japan and France, and 1 in the United Kingdom and Spain. From the perspective of financing structure, China, Japan and France are all countries with a high proportion of indirect financing. From the perspective of macro leverage, at the end of 2020, the macro leverage ratio of the non-financial sector of the top seven countries in the world's GDP is: the United States 296.1%, China 289.5%, Japan 418.9%, Germany 208.8%, the United Kingdom 304.4%, India 180.8%, France 374.4%, and most of the non-financial sector liabilities form financial sector assets. Germany's macro leverage ratio is lower than the average of advanced economies (321.3%) and even emerging market countries (240.1%), which is an important reason why Germany's economy is developed and the banking sector is not large among thousands of large banks. From the perspective of internationalization, among the four European banks in the top 20, HSBC and Spanish international banks are mainly serving foreign markets, and the two French banks are mainly engaged in local business.
Let's look at the comparison between China and the United States. In 1970, China was the world's eighth-largest economy, with a GDP of 8.6 percent that of the United States. In 2009, china's banking sector surpassed the Size of its assets in the United States for the first time. In 2020, China is already the world's second-largest economy, with a GDP of 74% of that of the United States. China's financial system is dominated by indirect financing, while U.S. companies are dominated by direct financing. At the end of 2020, the ratio of assets to GDP of China's banking industry was 262%, much higher than that of the United States (98%); the asset size of China's commercial banks (266 trillion yuan, equivalent to 40.7 trillion US dollars) was twice that of US commercial banks (20.5 trillion US dollars); the total market value of listed companies in China (79.7 trillion yuan, equivalent to 12.2 trillion US dollars) was 78% of GDP, while the total market value of the US stock market (41.6 trillion yuan) was 199% of GDP.
It is worth noting that there is still a gap between the income-generating capacity of Chinese entities and the market value of banks and the United States. In the 2020 Fortune Global 500 (ranked by 2019 operating income, including banks), the operating income of American, Chinese and Japanese companies accounted for 29.45%, 24.91% and 9.38% of the total of the world's top 500 companies, and the profits accounted for 40.98%, 21.43% and 4.29% respectively. At the end of June 2021, the top 10 banks in the world by market capitalization were JPMorgan Chase & Co., Bank of America, ICBC, CHINA Construction Bank, China Merchants Bank, Agricultural Bank of China, Wells Fargo, Citigroup, Bank of China, and Royal Bank of Canada. Although ICBC's assets at the end of 2020 were 1.5 times that of JPMorgan Chase, its market value was only more than half that of JPMorgan Chase.
China's banking industry has helped china's economy to develop by leaps and bounds in time and space, and it has also made great progress, from a small proportion to a high position on the list of thousands of large banks. However, at the same time, China's banking industry still faces many contradictions and challenges: China's banking industry ranks higher than That of Chinese entities in the world, and the dispute over "bank profiteering" is endless; some investors are not optimistic about the investment value of banks and have doubts about the future development and risk exposure of banks.
In fact, the large profit scale of China's banking industry is mainly due to the large scale of its assets, while ROA and ROE are at a reasonable level in the world. The above problems in China's banking industry are mainly caused by China's excessive dependence on the economic development model supported by bank credit, and the problem of high macro leverage ratio is worthy of attention. In the future, China's banking industry needs to continue to explore its own high-quality development path in serving the high-quality development of the national economy, and strive to take into account the interests of all stakeholders, so that potential risks can be gradually resolved and the leverage ratio will be stable and reduced.
Revelation two: from the characteristics of banking business models to see the "negative banking theory"
Bill Gates likened banks to dinosaurs in 1994, arguing that bank customers would be lost to other high-tech financial service providers in the future. This view was widely disseminated. Since then, various unfavorable bank statements have been heard. In recent years, in China and the United States, the banking industry is basically the industry with the lowest valuation (pb) in the capital market. However, global banking assets grew at an average annual rate of 11.6% between 1996 and 2006, while global bond markets grew by 9% per year and equities by 10% over the same period. The 2008 financial crisis caused the total assets of thousands of large banks to decline and profits to plummet, but after the financial crisis, banks resumed growth.
The root cause of the "bearish banking theory" is that under the background of the decline in global economic growth, the rise in leverage ratio, the impact of financial technology, and the development of capital markets, the advantages of banks' following business model characteristics have declined and their disadvantages have been magnified:
Characteristics of banking operational risks and intertemporal transactions. Banks are the only industry that operates on the basis of money (general equivalents), which is operating currency on the surface and operational risk in essence. As Greenspan points out, "Risk-taking and risk aversion are fundamental to almost all financial decisions, while the non-financial sector depends more on factors such as engineering, technology, and organizational management." "Banks allocate social capital resources through inter-period transactions, play a role in term conversion, credit conversion, and liquidity conversion, and bear the risk that the principal and interest of loans may not be recovered." Banks make profits through operational risks, and risk exposure lags behind. During periods of high economic growth, investors are more optimistic about banks, and when economic growth declines and potential risks rise, investors will look down on banks.
Banks need capital and business models that are more "heavy". After the scale of the bank becomes larger, there are risk diversification, sharing management costs and reputation, information advantages, and having certain economies of scale advantages. To avoid the risk of taxpayers paying for serious risks, regulation also imposes additional capital requirements on systemically important banks. However, due to the need for capital in the bank asset business, economies of scale are not too significant, business models are "heavy" and lack of imagination space, while the marginal cost of Internet companies' products and services tends to be close to zero, winner-take-all, and is more sought after by the capital market.
However, there is no need to be too pessimistic about commercial banks.
Banking services are always needed. Bright King says "banking everywhere, never at a bank," but even if you don't need a physical bank, you need an online bank to provide banking services. Some people once thought that p2p can avoid the bank's "middleman to earn the difference", but the failure of p2p just proves that commercial banks are an effective business model that connects investment and financing in addition to the capital market.
Due to the stability of large banks and higher dividend yields at low valuations, banks still have some investment value. The average life expectancy of enterprises is shortening. According to statistics, the average survival time of S&P 500 companies is 61 years in 1958, 25 years in 1980, and 18 years in 2011. In contrast, most of the large banks in Europe and the United States have decades or even centuries of foundations; although China's four major banks have a relatively short history, and due to the increase in small and medium-sized banks, the market share tends to decline, but they have also maintained a leading position in the industry. For the large banks that have problems, countries mostly rescue themselves through state capital injection or other bank acquisitions, and few are liquidated and bankrupt.
Revelation three: the key to the success or failure of commercial banks
The ups and downs of large banks on the list, the experience and lessons are worth studying and learning.
The changes in major banks such as Citigroup, Royal Bank of Scotland and Deutsche Bank reflect the bank's most important strategic management and risk management. Aggressive expansion strategies can be a temporary success, but sow the seeds of failure, especially when the macroeconomic and financial environment is adversely volatile. Banks have a clear strategy, steady risk management, short-term view may not be significant effect, even because of relatively conservative, in the economic boom period may be less short-term performance than aggressive banks, but the long-term effect will gradually appear, the economic and financial crisis is the touchstone to test the level of bank risk management. Just to name a few:
Citigroup: From the 1990s to the early 2000s, Citi was the world's most successful bank, known for its globalization, innovation and integration. But in the midst of the 2008 financial crisis, there were thunderstorms, a net loss of $27.7 billion, and in March 2009, the market value shrank by 98% from its peak, and bankruptcy was avoided under the capital injection and guarantee of the US government. Since then, the transformation around globalization, urbanization and digitalization has achieved certain success, maintaining the status of one of the four major banks in the United States.
Royal Bank of Scotland (RBS): Until 2000, RBS was a regional bank. In 2000, it acquired the National Westminster Bank, and in the following years, more than 20 mergers and acquisitions were made. In 2008, RBS ranked 3rd in Tier 1 capital and 1st in asset size among thousands of large banks. But the unconventional mergers and acquisitions expansion consumes a lot of capital, was hit hard in the 2008 financial crisis, accepted the British government injection, and then massively restructured and contracted to exit some markets. RBS has fallen to Tier 1 capital and 36th in asset size on the 2021 list.
Deutsche Bank: Deutsche Bank became the world's largest bank in terms of assets in 1913, experienced ups and downs, and in 1999 it became the world's largest bank with assets. However, due to excessive dependence on investment banking business, large fines for violations, excessive exposure to derivatives, and excessive leverage, losses occurred in 2015-2018, falling from 2019 to 20 outside the list, ranking 34th in Tier 1 capital and 21st in assets in 2021. However, Deutsche Bank's business transformation in recent years has been fruitful, and in the 2021 list, the turnaround ratio is the first place compared with the previous year.
At different times, the most successful banks and investors prefer different banking models. After the bank chooses the strategic direction, it must not only maintain its concentration, but also need to adjust in a timely manner. Whether banks choose to stick to the domestic market or be more international, focusing on retail banks or investment banks, different strategic directions are likely to succeed or fail. Success or failure depends not only on the bank's own level of operation and management, but also on the market environment. Banks should continue to cultivate core competitiveness in the chosen strategic direction, rather than stopping and wavering. However, if it is found that the strategy cannot adapt to changes in the external environment, it also needs to be adjusted in a timely manner.
For example, before the 2008 financial crisis, Citigroup was integrated and international, was a leader in financial innovation, and the concept of "one-stop financial services supermarket" was deeply rooted in the hearts of the people, and it was the most sought after by investors and the largest bank with the largest market value. The financial crisis exposed Citi's aggressive operation and shortcomings in risk management. Wells Fargo was optimistic about investors who hated complex and high-risk businesses because of its relatively conservative business philosophy, little involvement in complex financial derivatives, and a high proportion of retail business, and began to become the no. 1 market capitalization of the US banking industry in 2012, until 2016, when the market value of "fake account gate" fell, JPMorgan Chase became the champion of banking market value and has remained so far. No one strategy and strategy can win all periods, and investor preferences are switching.
Large banks with assets of more than RMB trillion need to have strategic priorities and characteristics, and also need to have a more balanced business development, promote each other, and diversify operational risks. For example, JPMorgan Chase & Co. is a strong and balanced bank with retail, corporate, investment banking and other businesses. The same is true of ICBC. In the 2008 financial crisis, the risk problems of large investment banks were more serious than those of commercial banks. However, in 2020, thanks to the increase in mergers and acquisitions, bond issuance and other transactions and the stock market, and there is no pressure on the increase in non-performing loans and more promotions, goldman Sachs and Morgan Stanley's pre-tax profits increased by 16% and 28% respectively, and deutsche Bank's investment banking sector is also the largest increase in revenue among its four major sectors.