Global Banking

The equations are changing rapidly…

The global banking space has changed drastically over the past 25 years. Back in the early 1990s, the world’s largest banks were from Japan. The likes of Sumitomo, Mitsui and Mitsubishi had touched assets of nearly $1 trillion way back in the early 1990s. Then came the lost decade for Japan! The problem of loans linked to real-estate surfaced in Japan. Today, most of these Japanese banks have assets that are a fraction of what they had in the early 1990s due to the collateral damage.

How 2008 changed banking…

 The one event that actually changed the contours of global banking irreversibly was the Lehman crisis of 2008. Some of the world’s largest banks like Citi, BoFA, Deutsche, UBS, ABN Amro, Barclays and scores of others crumbled under the weight of toxic assets. This has substantially changed the pecking order of banks in the world. Consider these instances. Today the most valuable in the world is Wells Fargo of the US. This bank was largely unheard of outside the US but prudent banking helped them ride the Lehman storm. In the European banking space dominated by German, Swiss and French banks, the most valuable bank is Banco Santander of Spain. Interestingly, with a market cap of $105 billion, 5-times more valuable than Deutsche Bank. Of course, we are not including HSBC as a European bank due to its co-presence in the UK and in the island of Hong Kong.

Rise of Chinese Banks…

Chinese banks were unheard of till a decade ago. Today they account for 50% of the top banks in the world in terms of assets and market value. Banks like ICBC, China Construction Bank, Agricultural Bank of China and Bank of Communications are among the top in any ranking of banks. Like Japan in the early 1990s, the Chinese economy also threatens to slip into a lost decade. One only hopes that these banks do not implode the way many of the Japanese banks did. But sadly, the two economies are eerily similar. That is the worry!

Some banking anomalies, are they?

To understand anomalies, you need to understand Deutsche Bank. It has an asset base of $1.9 trillion and a market cap of a paltry $21 billion. In fact, HDFC Bank with a market cap of $45 billion is more valuable than Deutsche Bank and Credit Suisse combined. It may sound far-fetched but it is about two key factors. Firstly, if Deutsche has assets of $1.9 trillion it also has open derivative exposures to the tune of $50 trillion. That is surely a ticking time bomb. Wells Fargo with an asset base of $1.5 trillion has a market cap that is 15 times that of Deutsche Bank. The moral of the story is that banks will be evaluated based on ROI and risk, not just size. That is the new paradigm of global banking. That is the way it should be. Global banking seems to have finally come of age! ©

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