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 is a clutch of major developed
state economies, including France
(82.9, third), Germany (80.5, fourth),
Canada (79.9, fifth), and Australia and Italy (78.4, joint-sixth). 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 (even if not percentage) terms. However, several
states are notable
by their absence in this cluster. Austria falls short of the pack (72.4,
12th), along with
Greece (69.4, 16th), but it is the poor performances of
Switzerland (62.7, 26th) and Japan (56.3, 34th) that
really stand out.
Both states 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. Singapore (77.1, eighth) and Malaysia (72.1, 11th) 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
ninth overall. As the world' s third-largest
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, at 90.0.
What
prevents China from rising any higher is its poor performance in the
' Limits of potential returns - Country
structure' sub-category, at 57.5
(42nd), and the ' Risk to realisation of returns category' , at 80.0 (ninth).
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 the local markets and
also means that average deposit levels are still very low.
Emerging
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 removing
credit and
capital from Central and Eastern Europe. These risks are
exacerbated by the deep recessions we see in the
Baltic states, Bulgaria,
Russia and Turkey, and the risks 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
emerging European state is
regional heavyweight Russia, at 73.8 (tenth
globally), and that the top ' new' EU member is the Czech
Republic, at 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 sectors has been high
oil prices. Hydrocarbon revenues have
swollen bank balances across the Gulf region, with significant
amounts of
capital and liquidity finding their 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. 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 dependent upon oil revenues,
and there are few drivers of either
economic or commercial banking growth outside the natural resources
sector. Indeed, it is particularly worrying that not one MENA state has broken
into the top ten states in the
' Limits of potential returns - Market
structure' sub-category. The best performer is the UAE, in 18th place.
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' , at 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 last 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, 123rd), 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 that
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 (i.e. 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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