Since the end of the savings-and-loans crisis in the US in 1993 – a catastrophic era which saw over 1,000 US banks fail (see RBI 597) – banking has been one of the most profitable consumer industries in many markets. Even with major market dips, such as the Asian financial crisis in 1997-98 and the 11 September terrorist attacks in 2001, consumer banking has powered ahead – and continues to do so in emergent super economies such as Brazil, Russia and China.
$1.2 trillion in profit
Research carried out by Retail Banker International shows just how successful the market has been over the past 10 years: profits from just 20 retail-focused banks based in Europe and the US totalled $1.2 trillion in the 10 years from 1998 to 2007. The most profitable banks over the period were those which are now most affected by credit losses and write-downs on asset-backed securities in the US as the banking boom sowed the seeds of the current bust.
Citi, which tops the list, had a combined profit over 10 years of $145.8 billion. Bank of America made $113.9 billion and HSBC made $99.1 billion in profit over the decade.
The magnitude of those earnings puts into perspective the escalating level of write-downs European and US banks have made since the start of the subprime crisis in the middle of last year.
Combining RBI’s research on profits with Bloomberg’s August figures on credit losses – which includes six months of write-downs not featured in the profit survey – it can be shown that Citi’s $55.1 billion in credit losses since the start of the turmoil has effectively wiped out its profit over the last three years. Bank of America’s write-downs of $21.2 billion were equivalent to 16 months’ worth of profits, while HSBC’s $27.4 billion in write-downs accounted for 18 months of its earnings.
RBI’s survey also provides a snapshot of the banking industry as a whole. The average profit of the selected banks over the decade rose from $2.1 billion to $9.1 billion, a compound annual growth rate of 12 percent. The growth has not been unrelenting – between 2000 and 2001, profit among the 20 banks declined 24.3 percent. This was in part a result of weakening domestic economies, coupled with the 11 September terrorist attacks which exacerbated negative market sentiment.
But it was also skewed negatively by changes in accounting practices at Deutsche Bank and a large non-operational gain of $7.09 billion by ING, inflating the 2000 figures. Deutsche Bank converted to the US GAAP standard and booked a huge increase (102 percent) in profit in 2000 and a massive decline (-96.6 percent) in 2001.
It is remarkable that HSBC and Bank of America remain banking success stories in spite of the torrid conditions both have endured in the US. Particularly in the case of HSBC, the survey shows the value of real product and geographical diversification, as well as the benefit of maintaining a strong capital base (see HSBC stands out from the crowd). The credit losses in its US consumer finance unit, HSBC Finance (formerly Household), and investment bank have been more than offset by the gains it has made across the world.
All of its international businesses have remained profitable despite losses in the US – it now makes 65 percent of its profit in the Asia-Pacific region. The breadth of its product offering, from unsecured consumer loans in its international credit card business, to wealth management, global consumer banking, and insurance, have cushioned it from declines isolated to individual areas of financial services.
Royal Bank of Scotland (RBS) was the bank which showed the strongest and most sustained growth in profits in the 10 years studied by RBI on a compound annual growth basis. It achieved a 27.6 percent compound annual growth rate (see chart opposite). Again, it has been one of the banks hit hardest by the financial turmoil.
In RBS’s case, its purchase of parts of the ABN AMRO franchise last October for €27.2 billion ($37.2 billion) at the height of the market and concerns over the health of its retail banking operations in the US have seen its profits in the first half of 2008 evaporate.
The conclusion from these examples seems to be: the higher the growth over the last 10 years, the greater the likelihood of problems in the current turmoil. But there are exceptions. Santander, which registered the second highest compound growth, has so far ridden out the storm despite a domestic and commercial crisis in the housing market in Spain and participation in the ABN AMRO deal. The Spanish outfit paid €19.9 billion for its part in the acquisition, but quickly made a €3 billion profit by selling on Antonveneta, an Italian commercial bank it acquired as part of the deal, to Banca Monte dei Paschi di Siena.
And it is not just the achievements of the internationally diverse banks which are highlighted by the survey. The growth witnessed by Intesa Sanpaolo and Wells Fargo proves that banks do not need to have a significant overseas presence – or, in the case of Wells Fargo, any – to be profitable.
From €1.53bn to €7.25bn
Intesa, which makes 10.5 percent of its profit from its international subsidiary banks, increased overall profit from €1.53 billion in 1998 to €7.25 billion in 2007, a compound annual growth rate of 16.8 percent. The biggest improvements in profit came after the merger of Banca Intesa and Sanpaolo IMI, with a jump of $3.66 billion to $10.4 billion from 2006 to 2007. The deal, announced initially in September 2006, gave them around a 22 percent market share of the Italian retail banking market.
In the US, AAA-rated Wells Fargo – the only bank in the US which now holds the top rating from ratings agencies Standard and Poor’s and Moody’s – has maintained its reputation as a conservative retail bank which focuses on doing the basics well. Its strengths are in building customer loyalty through good service, cross-selling products and remaining committed to maintaining an extensive branch network – which will return to being the country’s largest following the recent acquisition of Wachovia (see Wells Fargo takes the lead and News Digest).
It has a cautious funding stance, with deposits funding 77.8 percent of total loans, and a diverse asset profile. While it generally underperformed the industry in the boom years of 2003-06, it has now started to outperform at probably the most important time.
The only bank of the 20 in the survey to make an annual loss at any stage during the decade was Washington Mutual, an early indicator of the credit losses which engulfed its business one month ago.
The decade was a golden age for bank profits, but regulators and the taxpayers that are now being asked to bail out the financial system will see it as another example of banks taking excessive risks. They are beginning to question whether such growth is desirable for businesses so fundamental to the functioning of national economies, and an increase in regulation within the industry is certain as governments take stakes in banks.
It looks likely to be a long time before the industry will see a decade like it again.