Abstract
We now rate 59 banking systems, and it is little surprise that the developed
states dominate the top spots.
The US and UK come first and second place,
respectively, with scores of 88.7 and 88.0 out of 100. Of
crucial
importance to both scores are the very high rankings in the crucial ' Risks to
realisation of returns -
Market structure' sub-category, which accounts
for 42% of the overall score. The two countries are
ranked first and
second in this category as well. This sub-category captures the size of the
sector, and the
potential for assets and loans to grow in US dollar terms.
While both systems have been buffeted by the
global credit crunch and will
not post stellar growth numbers in percentage terms for the foreseeable
future, the sheer size of the US and UK' s financial systems means that there
is massive potential for
deposits, assets and client loans to rise. In
addition, the generally solid institutional framework - which
looks set to
be augmented with new post-credit crunch regulations - will continue to
provide a firm basis
for the sector.
A Mixed Bag For The Developed
States
Following just behind the US and UK are a clutch of major developed
state economies, including France
(82.9, 3rd) and Germany (80.5, 4th),
Canada (79.9, 5th), as well as Australia and Italy (78.4, joint 6th).
All
of these sectors have reasonable prospects into the medium term, having a
large deposit and loan base,
as well as the potential to grow
substantially in volume (if not percentage) terms. However, several states
are notable by their absence in this cluster. Austria falls somewhat short
(72.4, 12th) of the pack, along
with Greece (69.4, 16th), but it is the
poor performances by Switzerland (62.7, 26th) and Japan (56.3,
34th) which
really stand out. Both countries are going to struggle to post increases in
asset or loan growth
in US dollar terms over the forecast period, to 2013,
partially as a result of currency moves to the
downside, but also, in the
case of Switzerland, because of the relative weakness of the two key
banking
groups, UBS and Credit Suisse, which had built up large franchises
during the good years.
Asia Rising
Significantly, just behind the main
pack of European economies, several Asian states have managed to
post
strong performances in our risk ratings. Malaysia (72.1, 11th) and Singapore
(77.1, 8th) come in
ahead of Austria. However, Singapore leads the world
globally in the ' Risks to realisation of returns -
Country risk'
sub-category, with a score of 84.0, while South Korea has a score of 64.0.
Singapore' s high
score rests on good scores for key elements of BMI' s
economic, political and business environment risk
ratings, which measure
the risks to policy continuity. In contrast, the small size of the economy
and
banking sector is a major factor limiting the potential for expansion,
especially in a world of lower
liquidity and risk appetite. South Korea,
however, has a large domestic economy to provide the deposit
base
necessary to fund credit growth.
Elsewhere in Asia, we note that China
(overall score 75.1) ranks 9th overall. As the world' s third biggest
economy - and still an emerging one at that - it is little surprise that the
scope for asset growth in China is
huge. This has allowed the country to
be ranked fourth in the ' Limits of potential returns' category (74.0),
and
post the highest ' Limits of potential returns - Market structure' sub-category
score with 90.0. What
prevents China from rising any higher is its poor
performances in the ' Limits of potential returns -
Country structure'
sub-category, 57.5 (42nd), and the ' Risk to realisation of returns category' ,
80.0 (9th).
Of particular concern to BMI is the potential for a collapse
of the local system, because much lending is
still state directed and risk
management is still embryonic. In addition, despite the size of the whole
economy, per capita GDP remains low. We forecast it at US$3,024 for 2009, with
significant income
inequalities. This severely limits the ability of
financial institutions to sell premium products in local
markets, and also
means that average deposit levels are still very low.
Central And Eastern
Europe, Limited Opportunities
The emerging European states are posting
surprisingly mediocre ratings outturns. We highlight the
potential for a
systemic crisis in the region as the major Western European banks remove
credit and
capital from Central and Eastern Europe (CEE). These risks are
exacerbated by the deep recessions we
see in the Baltic states, Bulgaria,
Russia and Turkey, and the risk of further currency crises that could
create even greater economic dislocations, as the massive economic asymmetries
that have built up in the
region unwind. When taken in tandem with the
relatively small size of the local economies and the rapid
banking sector
expansion seen in recent years, it is little surprise that the highest rated
CEE state is
regional heavyweight Russia, with 73.8 (10th globally), and
that the top ' new' EU member is the Czech
Republic, 64.5 (24th). Coming
close to the bottom of both the regional and global peers groups are
Latvia
(39.0, 55th) and Ukraine (43.0, 51st), which have both been forced
to tap the IMF and EU for emergency
funds.
MENA Below Par
The big
story in recent years in the Middle East and North Africa (MENA) banking
sector has been high
oil prices. Hydrocarbon revenues have swollen bank
balances across the Gulf region, with significant
amounts of capital and
liquidity finding its way to North Africa as well. With the days of stellar
oil prices
gone for now (and not likely to return over the forecast
period) the outlook is not so positive for the
region, and this is
reflected in the fact that the two highest ranked countries are the UAE at
14th and
Saudi Arabia at 21st. No other MENA state has broken into the top
25 of our 59-strong ratings universe.
Of particular concern is that while
some progress has been made on putting the region' s financial
infrastructure on a more sustainable footing in recent years, it is still far
too dependant upon oil revenues,
and there are few drivers of economic or
commercial banking growth outside the natural resources sector.
It is
particularly worrying that not one MENA state has broken into the top 10
states in the ' Limits of
potential returns - Market structure'
sub-category. The best performer is the UAE, in 18th place and even
with
the growth of Islamic banking products, the boom years are over. We expect
much more moderate
growth in the financial space over the forecast
period.
Opportunities In Africa
While Africa remains one of the most
' under-banked' regions in the world - and hence one of the most
insulated
from the global credit crunch - the commercial banking business environment
ratings still reflect
the major problems in operating even in the region' s
largest economies. South Africa' s overall 70.5 rating
score put it in 13th
place globally, while in the ' Limits of potential returns - Market structure'
category it
scores 73.3, but it receives poor score for ' Risks to
realisation of returns - Country risk' with 56.0. The
country' s main
weaknesses, in common with Kenya and Nigeria, are bureaucracy, external
economic risk
and financial market risk, all of which deter potential
investors from engaging more fully in the local
market.
Diverse Latin
Performance
Again, in Latin America, the ratings do not tell one
particular story, with a diverse regional picture
developing. Perhaps the
most interesting story is among the worst performers, which include
Argentina
(43.0, 49th), Colombia (50.3, 43rd) and Venezuela (36.0, 56th).
All three economies face difficult times
over the coming years, having
been fiscally imprudent. The latter two, especially Venezuela, have
benefited significantly from the oil boom, which has now come to an end. There
is little to be optimistic
about in any part of the ratings for these
countries, and we anticipate a much weaker performance than in
Brazil
(66.5, 23rd), Chile (66.6, 22nd) or even Mexico (67.6, 20th). Of particular
note is Brazil' s crucial
' Limits of potential returns - Market structure'
sub-category rating of 80.0 (seventh globally) and Chile' s
reasonably
solid 80.0 ' Risks to realisation of returns - Market structure' rank of
11th.
Commercial Banking Business Environment Rating Methodology
Since
Q108, we have described numerically the banking business environment for each
of the countries
surveyed by BMI. We do this through our Commercial
Banking Business Environment Rating (CBBER),
a measure that ensures we
capture the latest quantitative information available. It also ensures
consistency
across all countries and between the inputs to the CBBER and
the Insurance Business Environment
Rating, which is likewise now a feature
of our insurance reports. Like the Business Environment Ratings
calculated
by BMI for all the other industries on which it reports, the CBBER takes into
account the
limits of potential returns and the risks to the realisation
of those returns. It is weighted 70% to the former
and 30% to the
latter.
The evaluation of the ' Limits of potential returns' includes
market elements that are specific to the
banking industry of the country
in question and elements that relate to that country in general. Within
the
70% of the CBBER that takes into account the ' Limits of potential
returns' , the market elements have a
60% weighting and the country
elements have a 40% weighting. The evaluation of the ' Risks to
realisation
of returns' also includes banking elements and country elements (specifically,
BMI' s
assessment of long-term country risk). However, within the 30% of
the CBBER that take into account the
risks, these elements are weighted
40% and 60%, respectively.
Further details on how we calculate the CBBER
are provided at the end of this report. In general, though,
three aspects
need to be borne in mind in interpreting the CBBERs. The first is that the
market elements
of the ' Limits of potential returns' are by far the most
heavily weighted of the four elements. They account
for 60% of 70% (or
42%) of the overall CBBER. Second, if the market elements are significantly
higher
than the country elements of the ' Limits of potential returns' , it
usually implies that the banking sector is
(very) large and/or developed
relative to the general wealth, stability and financial infrastructure in
the
country. Conversely, if the market elements are significantly lower
than the country elements, it usually
means that the banking sector is
small and/or underdeveloped relative to the general wealth, stability and
financial infrastructure in the country. Third, within the ' Risks to the
realisation of returns' category, the
market elements (ie: how regulations
affect the development of the sector, how regulations affect
competition
within it, and Moody' s Investor Services ratings for local currency deposits)
can be markedly
different from BMI' s long-term risk rating.
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