Perhaps nowhere is Shifting Wealth more visible today than in the banking world, according to an excellent article in the twice-weekly (Swiss) Finanz und Wirtschaft. Western banks are still the biggest when measured by the assets they hold on their balance sheets (with Deutsche Bank in the lead). But the ongoing Eurozone crisis has shown that much of the underlying value is shaky and in particular European banks have to deleverage strongly as they are utterly undercapitalised. The OECD’s excellent Adrian Blundell-Wignall does not tire to raise the alarm clocks on the fragile state of OECD commercial banks.
One of the wonderful ironies of contemporary journalism is that the alarm clocks have been belling since decades on the imminent implosion of Chinese banks. Unlike Lehman & Co, that implosion has not materialised; nor are Chinese banks on LTRO lifeblood support, as most European banks are.
Ranking Banks Market Capitalisation (end 2011)
Rank
|
Bank
|
Country
|
Market cap, bn$
|
1
|
ICBC
|
China
|
241
|
2
|
China Construction Bank
|
China
|
196
|
3
|
Wells Fargo
|
US
|
161
|
4
|
HSBC
|
UK
|
151
|
5
|
Agricultural bank of China
|
China
|
142
|
6
|
JP Morgan Chase
|
US
|
141
|
7
|
Bank of China
|
China
|
129
|
8
|
Itaú Unibanco
|
Brazil
|
88
|
Source: Finanz und Wirtschaft, 7.3.2012
The investors (who have just been burned by Western bank share declines) think that BRIC banks hold more value (see the table for current market capitalisation). Only in 2005, the ranking of top bank market capitalisations held just Western banks. The high market capitalisation of Bric banks compared their assets may be justified, for three reasons: high profit growth, high margins, low default risk. The graph on bank capital returns does indeed suggest that emerging market banks are safer and generate a higher return on equity than do G7-based banks.
Return on Bank Capital
Source: Finanz und Wirtschaft, 7.3.2012
There are plenty of reasons for that. Public debt dynamics are much more favourable in emerging countries than in OECD countries, which translates into lower default risk on bank claims on public entities. The rising middle class generates rising savings, which provide low-cost funding to banks even if financial liberalisation will raise the interest rates on private savings. And emerging market banks are safer and more transparent than many Western banks (Deutsche Bank shares, anyone?) as the share of investment banking is much lower.
A final observation. While Europe and the US had to nationalise banks notwithstanding their ideological priors, emerging-country banks have traditionally been either in public ownership or strongly directed by the public authorities. China’s government is majority owner of China’s four biggest banks, in India two out of four of the biggest banks are public; in Russia, the central bank is the majority owner of big banks such as Sberbank. The linkage between state and banking is very close in emerging countries, for industrial and other structural policies; that can generate losses, to be sure. But it can support growth, helping a safer asset base, while prudent bank risk management is a necessary collorary to industrial policy.
