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 is 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, third) and Germany (80.5, fourth
globally), Canada (79.9, fifth), as well as 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
somewhat short
(72.4, 12th) of the pack, along with Greece (69.4, 16th),
but it is the poor performance of Switzerland
(62.7, 26th) and Japan
(56.3, 34th) that really stands 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.
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 ninth 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,
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 (10th 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 in recent years. 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 either economic or commercial banking growth outside the
natural
resources sector. Indeed, it is particularly worrying that not one
MENA state has broken in to 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' , 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 widely 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, 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 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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