1. An Overview of the Worlds Largest BanksBy Hugh Thomas I am grateful to James Ma Kwok Wai for able assistance in constructing the tables used in this paper. This is a first draft. Please contact the author at hugh- thomas@cuhk.edu.hk with corrections, comments and suggestions for improvement.

2. Banks provides the world with liquidity the ability to exchange ownership claims with minimal cost. When we lend money to non-financial corporations, we are conscious of lending. But when depositors lend money to banks, they believe that they have money in the bank. Banks debts are defined as societys money the most liquid asset most members of society can hold. To make payments using bank deposits, customers must access the payments system through banks.Banking is defined in law and regulated by the national governments of the world. Most jurisdictions define banks as those institutions that take deposits and make payments on behalf of customers through payments systems. In some jurisdictions, banks are also defined by their lending power.In addition to providing legally defined banking services, banks lend, manage financial assets, and make and service markets. They provide trust and investment banking services underwriting, issuing, and making markets in securities and advising companies as to how they should tap and invest in the money and capital markets. Some banks also underwrite and distribute life and general risk insurance. In playing these diverse roles, banks are regulated by banking, securities markets, insurance and pension fund regulators. The critical nature of banking services and the high degree of government regulation leads customers to believe that the obligations of banks especially the largest banks are implicitly (if not explicitly) guaranteed by governments. This assumption, in turn, feeds the need for regulation.Banks liquidity, market making, market servicing, information processing and other intermediation services evidence large economies of scale. The importance of reputation in provision of these services and the implicit government guarantees of the largest banks increases further their scale economies. Thus it is not surprising that concentration in banking worldwide is very high. In most countries, a handful of very large banks dominate.Table 1 shows the ranking of the 100 largest banks by book value of equity capital. These 100 banks include over 67 percent of the worlds banking assets [measured by the assets of the worlds largest 1000 banks]. Within the top 100 banks, there is also substantial concentration, with the top 20 banks accounting for 50 percent of profit and 45 percent of the aggregate assets and capital. Bank concentration is likely to increase in future as national boundaries to the flow of capital decrease and nationally fragmented institutions, markets and instruments succumb to globalization. 2 3. Table 1: The 100 Largest Banks in the World by the Book Value of Equity CapitalTier 1 Capital %Pre-tax profit %Total Assets % Cumulative % Cumulative % Cumulative % Rank Bank Name Country Continent1CitigroupUSA North America 4.15%4.15%3.41%3.41%6.42%6.42%2JP Morgan Chase & Co.USA North America 3.83%7.98%2.66%6.06%1.65%8.08%3HSBC Holdings PLCHong Kong Asia3.75%11.73% 2.93%9.00%4.68%12.75%4Bank of America Corp USA North America 3.59%15.32% 2.55%11.54% 5.64%18.39%5Credit AgricoleFranceEurope3.54%18.85% 2.85%14.40% 2.77%21.16%6Royal Bank of Scotland UKEurope2.44%21.30% 2.57%16.97% 3.55%24.71%7Mitsubishi Tokyo Financial Group Japan Asia2.23%23.53% 2.25%19.22% 1.62%26.33%8Mizuho Financial Group Japan Asia2.17%25.69% 2.98%22.19% 2.33%28.67%9HBOS UKEurope2.04%27.74% 1.74%23.94% 2.36%31.02%10 BNP ParibasFranceEurope1.99%29.73% 2.83%26.77% 2.75%33.77%11 Bank of ChinaChina Asia1.94%31.67% 1.18%27.96% 1.11%34.88%12 Santander Central HispanoSpain Europe1.86%33.53% 1.80%29.76% 1.60%36.48%13 Barclays BankUKEurope1.79%35.32% 2.28%32.03% 2.36%38.85%14 Rabobank Group Netherlands Europe1.72%37.04% 1.49%33.52% 1.02%39.86%15 Sumitomo Mitsui Financial GroupJapan Asia1.70%38.73% 2.06%35.58% -0.27% 39.59%16 Wells Fargo & Co.USA North America 1.62%40.35% 0.99%36.56% 2.86%42.45%17 ING Bank Netherlands Europe1.61%41.96% 1.93%38.49% 1.14%43.60%18 Wachovia Corporation USA North America 1.59%43.56% 1.13%39.62% 2.03%45.62%19 UBSSwitzerland Europe1.53%45.09% 3.52%43.14% 2.51%48.13%20 ABN AMRO BankNetherlands Europe1.51%46.59% 1.90%45.05% 1.97%50.10%21 Deutsche Bank AG Germany Europe1.42%48.01% 2.63%47.67% 1.46%51.56%22 Groupe Caisse d'EpargneFranceEurope1.40%49.41% 1.70%49.37% 0.87%52.43%23 Societe Generale FranceEurope1.39%50.81% 1.88%51.25% 1.83%54.27%24 Credit MutuelFranceEurope1.38%52.19% 1.21%52.46% 0.95%55.22%25 China Construction BankChina Asia1.31%53.50% 1.08%53.55% 1.61%56.83%26 Lloyds TSB Group UKEurope1.26%54.76% 1.24%54.79% 1.79%58.62%27 Credit Suisse GroupSwitzerland Europe1.21%55.98% 2.21%57.00% 1.95%60.57%28 UFJ Holdings Japan Asia1.20%57.18% 1.68%58.68% -0.58% 59.99%29 HypoVereinsbankGermany Europe1.19%58.37% 1.46%60.14% -0.82% 59.16%30 Banca Intesa Italy Europe1.18%59.56% 0.86%61.00% 0.95%60.12%31 MetlifeUSA North America 1.17%60.73% 0.82%61.81% 1.04%61.16%32 Industrial & Commercial Bank of ChinaChina Asia1.13%61.85% 1.57%63.39% 0.09%61.25%33 Banco Bilbao Vizcaya ArgentariaSpain Europe1.12%62.97% 0.97%64.36% 1.50%62.75%34 Fortis BankBelgium Europe1.09%64.06% 1.51%65.87% 0.96%63.72%35 Norinchukin Bank Japan Asia1.03%65.09% 1.27%67.15% 0.48%64.19%36 Groupe Banques PopulairesFranceEurope1.02%66.11% 0.78%67.93% 0.76%64.95%37 Agricultural Bank of China China Asia0.93%67.04% 0.97%68.90% 0.22%65.17%38 Washington MutualUSA North America 0.91%67.95% 0.71%69.60% 1.23%66.40%39 UniCredito ItalianoItaly Europe0.90%68.85% 0.83%70.44% 1.21%67.61%40 National Australia BankAustralia Australia 0.84%69.69% 0.65%71.08% 0.90%68.51%41 DexiaBelgium Europe0.84%70.53% 1.22%72.30% 0.80%69.31%3 4. Tier 1 Capital %Pre-tax profit %Total Assets % Cumulative % Cumulative % Cumulative % Rank Bank Name Country Continent42 SanPaolo IMI Italy Europe0.83%71.35% 0.66%72.96% 0.76%70.07%43 U.S. Bancorp USA North America 0.82%72.17% 0.45%73.41% 1.64%71.71%44 Nordea Group SwedenEurope0.81%72.98% 0.86%74.27% 0.93%72.64%45 CommerzbankGermany Europe0.80%73.78% 1.33%75.60% 0.30%72.94%46 Scotiabank CanadaNorth America 0.79%74.56% 0.51%76.11% 0.86%73.80%47 MBNA CorpUSA North America 0.78%75.34% 0.14%76.25% 1.10%74.89%48 KBC Bank Belgium Europe0.74%76.09% 0.78%77.03% 0.88%75.77%49 Royal Bank of Canada CanadaNorth America 0.74%76.83% 0.80%77.83% 0.92%76.69%50 Bayerische LandesbankGermany Europe0.72%77.55% 1.02%78.85% 0.22%76.90%51 Caja de Ahorros y Pen. De Barcelona - La Caixa Spain Europe0.64%78.19% 0.35%79.20% 0.42%77.32%52 DZ Bank Deutsche Zentral Germany Europe0.64%78.83% 1.11%80.31% 0.41%77.73%53 Danske BankDenmark Europe0.64%79.47% 0.87%81.19% 0.71%78.44%54 Resona HoldingsJapan Asia0.62%80.09% 0.85%82.03% 0.96%79.40%55 Bank of Montreal CanadaNorth America 0.62%80.70% 0.49%82.52% 0.74%80.15%56 Landesbank Baden-Wurttemberg Germany Europe0.61%81.31% 1.06%83.58% 0.35%80.50%57 Toronto-Dominion BankCanadaNorth America 0.58%81.89% 0.57%84.16% 0.70%81.20%58 Countrywide Financial CorporationUSA North America 0.58%82.47% 0.30%84.45% 0.96%82.15%59 Canadian Imperial Bank of Commerce CanadaNorth America 0.56%83.02% 0.52%84.97% 0.65%82.81%60 National City Corp USA North America 0.55%83.57% 0.32%85.29% 1.09%83.90%61 SunTrust Banks USA North America 0.55%84.12% 0.36%85.65% 0.60%84.50%62 ANZ Banking GroupAustralia Australia 0.54%84.66% 0.41%86.06% 0.76%85.25%63 Dresdner BankGermany Europe0.52%85.18% 1.64%87.69% -0.02% 85.23%64 Capitalia Gruppo BancarioItaly Europe0.48%85.66% 0.42%88.11% 0.31%85.54%65 Commonwealth Bank GroupAustralia Australia 0.48%86.15% 0.46%88.57% 0.70%86.24%66 Fifth Third BancorpUSA North America 0.48%86.62% 0.22%88.79% 0.59%86.84%67 Allied Irish Banks Ireland Europe0.47%87.09% 0.32%89.11% 0.51%87.35%68 HSH Nordbank Germany Europe0.47%87.56% 0.51%89.62% 0.25%87.61%69 Banca Monte dei Paschi di SienaItaly Europe0.46%88.02% 0.40%90.02% 0.26%87.87%70 Capital One Financial CorporationUSA North America 0.45%88.48% 0.12%90.15% 0.63%88.50%71 Nykredit Group Denmark Europe0.45%88.93% 0.39%90.54% 0.21%88.71%72 Eurohypo Germany Europe0.45%89.38% 0.71%91.25% 0.22%88.93%73 Sumitomo Trust & Banking Japan Asia0.45%89.83% 0.33%91.58% 0.39%89.32%74 Standard Chartered UKEurope0.44%90.27% 0.33%91.91% 0.57%89.90%75 Golden West Financial GroupUSA North America 0.44%90.71% 0.25%92.15% 0.55%90.44%76 Kookmin Bank Korea Asia0.44%91.14% 0.41%92.56% 0.23%90.67%77 Shinkin Central Bank Japan Asia0.43%91.58% 0.60%93.15% 0.13%90.81%78 Westpac Banking CorporationAustralia Australia 0.43%92.01% 0.39%93.55% 0.66%91.47%79 Svenska HandelsbankenSwedenEurope0.42%92.43% 0.47%94.01% 0.52%91.99%80 Bank of IrelandIreland Europe0.42%92.85% 0.35%94.37% 0.46%92.45%81 DnB NOR GroupNorwayEurope0.42%93.26% 0.27%94.64% 0.43%92.89%82 Caja de Ahorros y Monte de Piedad de MadridSpain Europe0.40%93.67% 0.27%94.91% 0.32%93.21%83 DBS Bank Singapore Asia0.40%94.07% 0.25%95.16% 0.41%93.62% 4 5. Tier 1 Capital % Pre-tax profit %Total Assets % Cumulative %Cumulative %Cumulative % Rank Bank Name CountryContinent84 John Hancock Holdings (Delaware) USANorth America 0.40%94.47%0.23%95.39%0.24%93.86%85 KeyCorpUSANorth America 0.39%94.85%0.21%95.60%0.37%94.23%86 Skandinaviska Enskilda BankenSweden Europe0.37%95.23%0.55%96.15%0.37%94.60%87 BB & T CorpUSANorth America 0.37%95.60%0.23%96.38%0.62%95.22%88 BNL-Banca Nazionale del Lavoro ItalyEurope0.37%95.97%0.25%96.63%0.02%95.24%89 ForeningsSparbanken (Swedbank) Sweden Europe0.36%96.33%0.35%96.98%0.48%95.71%90 Banco Popular EspanolSpainEurope0.35%96.68%0.20%97.18%0.47%96.18%91 Bank of New York USANorth America 0.34%97.02%0.22%97.39%0.59%96.77%92 Shoko Chukin BankJapanAsia0.34%97.36%0.26%97.66%0.02%96.79%93 State Bank of IndiaIndiaAsia0.33%97.69%0.33%97.99%0.50%97.29%94 Banco Itau Holding FinanceiraBrazil South America 0.33%98.03%0.11%98.10%0.74%98.02%95 Erste Bank AustriaEurope0.33%98.36%0.44%98.54%0.38%98.41%96 Norddeutsche Landesbank Girozentrale GermanyEurope0.33%98.69%0.62%99.16%0.11%98.52%97 Mitsui Trust HoldingsJapanAsia0.33%99.02%0.27%99.43%0.37%98.89%98 Regions Financial Corp USANorth America 0.33%99.35%0.19%99.62%0.32%99.20%99 Desjardins Group Canada North America 0.33%99.68%0.20%99.82%0.33%99.54% 100 PNC Financial Service GroupUSANorth America 0.32%100.00% 0.18%100.00% 0.46%100.00% Source: Timewell, Stephen (2005) The Top 1000 World Banks, The Banker, 155, 209-326.Figure 1 shows that about 59 percent of banking assets of the worlds largest 100 banks are in Europe, 18 percent in North America and 23 percent in Asia and Australia. In terms of both tier 1 capital1 and pre-tax profits, Europes share is 42 percent and 47 percent, respectively. These numbers, however, tend to understate the financial importance of the United States for two reasons: first, the degree of banking concentration is lower in the US than elsewhere in the world and secondly, the degree to which financial needs are met by markets and non- banking financial institutions rather than by banks is much higher in the US than in the rest of the world. 1The Basel Accord definition of core equity capital for minimum regulatory capital requirements being the sum of common shareholders' equity common shares, contributed surplus, retained earnings, non-cumulative preferred shares plus minority interests in subsidiaries from Tier 1 capital minus goodwill. 5 6. Figure 1: Concentration of Capital, Assets and Profits by Territory Tier 1 Capital Total Assets Pre-tax Profit70%59%60%47%50% 42%40%33% 35% 30%25% 23% 19% 18%20% 10%0% Asia & AustraliaEurope North America Source: Timewell, Stephen (2005) The Top 1000 World Banks, The Banker, 155, 209-326.Table 2 shows the aggregate financial statements of the worlds largest 100 banks. Banks are different from non-financial institutions. Banks largest asset categories are loans. They maintain a large amount of liquid assets and their fixed assets comprise less than one percent of assets. They are financed mainly by deposits and other short-term funding. A non- financial corporation with this degree of liquidity mismatch between short-term assets and liabilities would be operating dangerously, but the short term liabilities of banks, their deposits, form in aggregate a core of stable funding.Banks are highly leveraged, with only five percent of total assets being funded with equity. This debt equity ratio of 19 would not be tolerated in a non-financial firm where debt equity ratios of over two are viewed as risky. Banks are able to leverage themselves to such a great extent because of the relatively low risk of their fixed income portfolio of assets which provides relatively stable income. Banks get over half of their revenue from the difference between interest received on loans and interest paid out on deposits and other funding. But they also have considerable fee income, from providing credit asset management and financial market related services to customers. Because banks lend to customers who may default on their debt, banks must make provisions for the possibility that loans will not be repaid. Banks provisions account for a large part of their income. Among the worlds 100 largest banks, loan loss provisions account for 8 percent of total revenue or about one third of net income. The global economy in the year 2004 was stable and growing; hence, loan losses were relatively moderate. When losses increase during recessions, provisions rise, often dramatically. 6 7. Table 2:Aggregate Financial Statements of the 100 Largest Banks in the World 2004 A. Balance Sheet US$ billion % US$ billion% AssetsLiabilities & EquityLiquid Assets5,933 15 Deposits & Short-term Funding28,616 70Other Assets 15,053 37Other Liabilities10,295 25Loans, Net 19,590 48Total Equity2,0525Fixed Assets 3871Total Assets 40,963 100 Total Liabilities & Equity 40,963 100B. Income Statement US$ billion % Operating Income 1,191 100 Net Interest Revenue 620 52 Other Operating Income 571 48Overheads729 61Loan Loss Provisions988Other-14 -1Profit Before Tax350 29Tax1089Net Income 243 20Source: Bankscope database, Bureau Van Dijk Electronic Publishing. Note: see appendix 1 for definitions of accountsThe operations of the banks can be summarized through asset quality, capital adequacy, profitability, efficiency and liquidity ratios. We compare worldwide and regional ratios with the five largest banks in the world. Data and ratio definitions are taken from Bankscope2.Asset QualityAsset quality is critical to banks, because credit risk the risk that loans will not be paid in full when due is the largest risk banks face. Banks carry their loans at their gross principal value reduced by reserves (or allowance for loan losses). There are two types of reserves. General reserves are portfolio-wide, based on loan characteristics, management experience and the state of the economy. Specific reserves are applied to specific loans that are known to be in difficultyBanks could set general reserves as a statistical expected portfolio loss: 2 Bankscope is a comprehensive, global database containing financial information on 24,000 public and private banks from around the world. It combines data from the main information provider, Fitch Ratings, and 6 other sources, with software for searching and analysis. 7 8. EL = PD LGD EADwhere EL = expected losses in an amount of currency, PD = the probability of default, LGD= loss given default expressed as a percent of loan outstanding and EAD = exposure atdefault in an amount of currency. But most banks do not use this approach because theinterest on the good loans in each portfolio is set high enough to offset the losses on the badloans so no reserve is needed for expected losses as defined above. General loan lossreserves are more often used as a quasi-equity cushion to smooth earnings and provideadditional comfort to depositors and debt-holders. Moreover, because the provisions thatreplenish reserves are charges to income, setting reserves higher may defer tax payments.The level of specific provisions depends on both loan quality (with higher provisions beingassociated with poorer quality) and the timing of writing off loans. When a bank writes offloans, it reduces both the gross loan principal and the reserves contra account. These factorscomplicate the analysis of loan loss reserves. On average, worldwide, average reserves are two percent of gross loans, with lower ratios inAustralia and North America. Among the top five banks, only Credit Agricole has loan lossreserves higher than the world average.To further examine the quality of assets, the loan loss reserve to gross loans ratio can be broken down into loan loss reserve to impaired loans and impaired loans to gross loans as follows: Loan Loss Reserve Loan Loss Reserve Impaired Loans= Gross LoansImpaired LoansGross Loans The ratio of loan loss reserves to impaired loans measure the adequacy of reserves, with higher ratios indicating greater conservatism. Impaired loans are loans with objective evidence that the bank is unlikely to recover the full amounts owing to total loans. The higher is the ratio of impaired loans to gross loans, the poorer is the quality of the portfolio. Using this interpretation, Australian and North American large banks display conservatism and higher quality portfolios while Chinese banks display low reserve coverage and poor portfolio quality. Among the top five banks, both Credit Agricole and Mizuho display low reserves and high impaired loans.Loan loss reserves are balance sheet asset contra accounts. Loan loss provisions (or charges to income) are the income statement accounts that add annually to reserves. The ratio of loan loss provision to net interest revenue in the long run measures the percent of loan interest lost to credit risk. Banks lending to higher risk customers will charge higher levels of interest to offset losses, increasing both the numerator and the denominator. But provisions tend to be volatile from year to year, depending on the economy. Across the world, 16 percent of net interest revenue was charged to loan loss provisions in 2004, but considerable variation among banks is evident. Japanese banks in 2004 charged more than 50 percent and UBS actually took a negative provision, reducing its level of loan loss allowances and increasing its income in the year because it concluded that its allowances understated the credit quality of its portfolio. Both Citigroup and HSBCs relatively high loan loss provision reflect their Latin American and consumer lending portfolios.Capital AdequacyBecause equity capital is able to participate in losses, the greater is the equity capital of a bank, the safer is the bank. But equity capital is more expensive than debt, so equity holders and managers (who are hired to maximize the returns of equity holders) have an incentive to8 9. keep equity capital to a minimum. Equity capital is such an important cushion to depositors, other debt-holders, deposit guarantors and regulators that it is subject to a worldwide consensus as to minimum acceptable levels. Under the Basel Accords3 the ratios of tier 1 capital to risk assets4 and total capital to risk assets must exceed 4% and 8% of risk assets respectively. These capital measures address the adequacy of a banks capital to cover both on- and off-balance sheet credit risks. Virtually all banking jurisdictions in the world subscribe in some degree to the Basel Accords, although they are under no legal obligation to do so. The Basel Accords are achieving their objectives. Banks are far more conscious of risk management than they would have been in the absence of the Accords and, as Tables 3 and 4 show, banks worldwide now maintain similar level of total capital to risk assets.It is instructive to compare the equity to total asset ratio with the Basel total capital to risk assets ratio. The lower equity to total assets of Chinese, Japanese and European banks reflects their greater proportionate investment in lower risk-weighted assets (especially government bonds) compared with their North American competitors. Note that UBS has an equity to total assets ratio of 2.3 percent, while Citigroup and HSBC have equity levels of over 7 percent; yet this ranking is reversed if one takes into consideration the risk weighting. In risk weighted terms, UBS is the most comfortably capitalized bank among the top five.Profitability and EfficiencyReturn on equity is a summary of bank performance from the equity holders point of view. Tables 3 and 4 show UBS as the most profitable bank with Japanese banks being the least profitable. As Mizuho is somewhat ahead of other Japanese banks in its restructuring and recovery from the Japanese bank crisis of the 1990s, its profitability exceeds its peers.Return on assets is a more problematic measure. Not only do banks asset compositions reflect different risk structures (see above), but also banks undertake risks not reflected in their total assets at all. So unless one is confident that the risks booked by two different banks to generate returns are similar, one cannot draw meaningful conclusions from simple ROA numbers. The higher efficiency suggested by Citigoups and HSBCs ROAs reflect the higher risk content of their on- and off balance sheet positions.Net interest margin is computed by dividing net interest income by total earnings assets. Fifty-two percent of the revenue of the largest banks in the world is derived from the spread between interest revenue and interest expense, so net interest margin is a major driver of profitability. Both North America and the rest of Asia achieve a net interest margin of 2.9 percent. Australia and China, on the other hand, has net interest margin of 2.3 and 2.2, respectively. Europe and Japan both have lower interest margins. Mizuho, Credit Agricole, Citigroup, HSBC and UBS have net interest margins that reflect their regions. Note that the high margins of HSBC and Citigroup, well above the world average of 1.7, reflect in part higher risk lending that achieves high spreads over cost of funds. 3 The 1988 Capital Accord, entitled Basel Committee on Banking Supervision. International convergence of capital measurement and capital standards and subsequent amendments, is frequently referred to collectively as Basel I. In June 2004 the Basel committee released International convergence of capital measurement and capital standards: a revised framework informally called Basel II. 4 Risk weighting calculates the amount of credit risk exposure the bank is deemed to face by Basel from a total position. The amount is calculated by weighting the value of each asset by its regulatory risk weighting. For example, under Basel I own-government obligations are risk weighted zero, interbank loans are risk-weighted 20 percent, retail mortgage loans are risk weighted 50 percent and other on balance sheet assets 100 percent. Off-balance sheet exposures are weighted to calculate a credit equivalent amount and then risk weighted.9 10. The expense ratio measures operational efficiency by comparing overheads to total revenues (the sum of net interest income and non-interest income). Wages make up the largest single overhead expense. According to this measure, China has the most efficient banks in the world, reflecting in part its relatively low salary levels. By the same token, the poorer efficiencies in North American and Europe is partly due to their higher overall salaries. Three of the top five banks have expense ratios that are higher than the world average of 61.2. HSBC and Mizuho are the most efficient among the top five.LiquidityWe started this overview with the observation that banks provide society with liquidity; hence, it is not surprising that banks book liquidity risk in the process. We use three measures of liquidity risk: the interbank ratio, loans to deposits and liquid assets to deposits.The interbank ratio is the money lent to other banks divided by money borrowed from other banks expressed as a percent. If one views customer deposits as core funding, a stable source of funds, then the liquidity risk of banks can be expressed as the degree to which banks rely on interbank (i.e., wholesale) funding. Using this perspective, if banks place in the interbank market all funds sourced from retail deposits not used to fund lending to the non-financial sector, and if banks source from the interbank market all funds in excess of their retail deposits necessary to make loans, then the interbank ratio would be a sufficient statistic to measure liquidity. An interbank ratio greater than 100, means that the bank is a net liquidity provider to the banking sector whereas an interbank ratio smaller than 100, implies that the bank is a net liquidity buyer. Within the largest banks of the world, the average interbank ratio is 74.6: these large banks in aggregate are net borrowers from the interbank market, relying on smaller banks, postal savings banks, credit unions etc to supply them with the funding necessary for their lending portfolios. In China, however, the large banks are characterized by large branch networks and place twice as many funds in the nascent renminbi interbank markets as they borrow. In the rest of Asia, interbank ratios are also high. HSBC, with strong retail branch network in Hong Kong, the UK and North America also has an interbank ratio of nearly 200.The two remaining ratios, loans to deposits and liquid assets to deposits (often called reserves to deposits) view all deposits as identical, whether they are retail or wholesale, customer deposits or bank deposits. In the former ratio, all loans are considered equally illiquid and in the latter, all reserve assets are considered equally liquid. This is clearly a strong assumption, because some loans are highly marketable, while others are truly illiquid. Moreover, clearing deposits are far more liquid than certain money market securities, but they are all considered as liquid assets. A high loans to deposit ratio and a low liquid assets to deposits ratio indicate low liquidity. The world average of loans to deposits is 68.5 and liquid assets to deposits is 21.0. The Australian banks appear to be the least liquid. UBS appears to be very liquid when considering loans to assets but illiquid when considering liquid assets to deposits. This effect,, however, is caused by marketable securities occupying a high portion of its assets. A similar distortion occurs with Citigroup, where deposits are a lower proportion of funding, leading to both the loans to deposits and the reserves to deposits appearing large. The analyst must exercise caution in interpreting these and other ratios bearing in mind bank- and country-specific the portfolio composition, operations and environment. 10 11. Table 3: Financial Ratios of Regional Bank Averages (2004) ChinaJapan Rest ofEurope North AustraliaWorld AsiaAmericaAverage Assets Quality Loan Loss Reserve / Gross Loans 1.72.21.9 2.21.40.92.0 Loan Loss Reserve / Impaired Loans 11.0 64.6112.877.8185.0255.9 70.0 Impaired Loans / Gross Loans 15.53.41.7 2.80.80.42.9 Loan Loss Provisions / Net Interest Revenue23.7 52.2 25.113.89.27.3 16.2Capital Adequacy Basel Tier 1 Capital / Risk Assets8.55.88.68.2 9.77.38.1 Basel Total Capital / Risk Assets10.1 11.1 11.9 11.613.4 10.2 11.8 Equity / Total Assets 3.84.07.64.1 8.27.35.0Profitability and Efficiency Return On Average Assets0.40.21.0 0.51.10.90.6 Return On Average Equity 11.64.6 12.612.0 13.6 12.9 11.8 Net Interest Margin 2.21.02.9 1.32.92.31.7 Expense Ratio45.1 54.1 51.563.7 63.8 56.7 61.2Liquidity Interbank Ratio 205.1 98.1196.176.4 46.5 85.2 74.6 Net Loans / Deposits & Short-term Funding65.3 62.1 74.868.4 70.0100.6 68.5 Liquid Assets / Deposits & Short-term Funding10.58.8 22.723.5 27.58.9 21.0 Table 4: Financial Ratios of the Largest Five Banks in terms of Assets (2004) UBSCitigroupMizuho HSBCCredit Agricole Assets Quality Loan Loss Reserve / Gross Loans 1.91.91.8 1.93.1 Loan Loss Reserve / Impaired Loans131.2150.8 74.7 120.6 75.4 Impaired Loans / Gross Loans1.51.32.4 1.54.0 Loan Loss Provisions / Net Interest Revenue-2.3 13.9 14.620.1 15.7Capital Adequacy Basel Tier 1 Capital / Risk Assets 11.88.76.2 8.97.9 Basel Total Capital / Risk Assets13.6 11.9 11.912.0 10.4 Equity / Total Assets 2.37.53.6 7.85.3Profitability and Efficiency Return On Average Assets0.51.20.5 1.10.5 Return On Average Equity 21.3 15.6 14.413.98.5 Net Interest Margin 1.13.70.9 3.11.2 Expense Ratio73.3 65.4 56.953.9 72.1Liquidity Interbank Ratio75.2 95.8 70.8 191.6 67.5 Net Loans / Deposits & Short-term Funding22.7 73.7 57.776.4 68.4 Liquid Assets / Deposits & Short-term Funding 8.5 68.56.720.4 20.2 Note: Names of banks included in computing the territorial averages are included in appendix 2 Definition of ratios are included in append 3 11 12. APPENDIX 1:DEFINITION OF ACCOUNTSLiquid Assets Other Bonds Cash and Due from Banks Other Funding Deposits with Banks Due from Central BanksOther Liabilities Due from Other BanksOther Liabilities Due from Other Credit InstitutionsSubordinated Debt Trading SecuritiesOther Non-equity Reserves Government Securities General Loan Loss Reserves Other Bills CDs Total Equity Treasury BillsHybrid Capital Minority Interests Other AssetsGeneral Banking Risk Listed Securities Preference Shares Equity InvestmentsCommon Shares Investment Securities Other Equity Reserves Non-Listed Securities Retained Earnings Other Securities Bonds Net Interest Revenue Other Investments Interest Received Deferred Tax Receivable Interest and dividends on debt securities Other Non Earning AssetsInterest received Intangible Assets Other dividend income Interest Paid Loans, NetInterest paid HP / Lease Loans to Other CorporateOther Operating Income Loans to Group Companies / Associates Fees and commissions receivable Mortgages fees and commissions payable Loans to Municipalities / GovernmentForeign exchange trading Loans to BanksSecurities trading Trust Account Lending Other / Derivatives trading Other Loans Sundry operating income Overdue Loans Investment securities gains Restructured LoansOther non-banking income Other non-performing Loans Loan Loss ReservesOverheads Loan Loss Reserves (Previously Deducted) Personnel ExpensesAmounts written off fixed asset investments Fixed Assets Other non-interest expenses Land and Buildings Depreciation Other Tangible AssetsProvisions for contingencies and commitmentsDeposits & Short-term Funding Loan Loss ProvisionsDeposits - Demand Specific loan loss provisionDeposits - SavingsGeneral loan loss provisionBanks DepositsMunicipalities / Government Deposits OtherOther Deposits Income from associatesCertificates of DepositDebt SecuritiesCommercial PaperMortgage BondsConvertible BondsOther Negotiable InstrumentsOther Securities 12 13. APPENDIX 2: NAME OF BANKS INCLUDED IN THE COMPUTATION OF REGIONAL AVERAGESName of Banks Included in the Computation ofBayerische Landesbank Regional Averages:DZ Bank Deutsche Zentral-Genossenschaftsbank Landesbank Baden-Wurttemberg China Dresdner Bank HSH Nordbank Bank of China Eurohypo China Construction Bank Norddeutsche Landesbank Girozentrale Industrial and Commmerical Bank of ChinaAllied Irish Banks Agricultural Bank of ChinaBank of Ireland Banca Intesa Japan UniCredito Italiano SanPaolo IMI Mitsubishi Tokyo Financial GroupCapitalia Gruppo Bancario Mizuho Financial GroupBanca Monte dei Paschi di Siena Sumitomo Mitsui Financial Group BNL-Banca Nazionale del Lavoro UFJ HoldingsABN AMRO Bank Norinchukin BankRabobank Group Resona Holdings ING Bank Sumitomo Trust & BankingDnB NOR Group Shinkin Central BankSantander Central Hispano Shoko Chukin Bank Banco Bilbao Vizcaya Argentaria Mitsui Trust Holdings Caja de Ahorros y Pen. De Barcelona - la Caixa Caja de Ahorros y Pen. De Barcelona - la Madrid Rest of AsiaBanco Popular Espanol Nordea Group HSBC Holdings PLC Svenska Handelsbanken State Bank of India Skandinaviska Enskilda Banken Kookmin BankForeningsSparbanken (Swedbank) DBS BankUBS Credit Suisse Group EuropeRoyal Bank of Scotland HBOS Erste BankBarclays Bank Fortis Bank Lloyds TSB Group Dexia Standard Chartered KBC Bank Danske Bank North America Nykredit Group Credit Agricole Scotiabank BNP Paribas Royal Bank of Canada Groupe Caisse d'Epargne Bank of Montreal Societe GeneraleToronto-Dominion Bank Groupe Banques Populaires Canadian Imperial Bank of Commerce Deutsche Bank AGCitigroup HypoVereinsbank JP Morgan Chase & Co. Commerzbank Bank of America Corp13 14. Wells Fargo & Co. Wachovia Corporation Australia Washington Mutual U.S. Bancorp National Australia Bank MBNA CorpANZ Banking Group Countrywide Financial CorporationCommonwealth Bank Group National City Corp Westpac Banking Corporation SunTrust Banks Fifth Third Bancorp(Note: 4 of the top 100 institutions, including Capital One Financial CorporationCredit Mutuel of France, Metlife and John Golden West Financial GroupHancock of the U.S.A., Banco Itau Holding KeyCorpFinanceira of Brazil, as listed in The Bankers BB & T Corpsurvey have been excluded in the computation due Bank of New York to unavailability of detailed information Regions Financial Corp PNC Financial Service Group Desjardins Group 14 15. APPENDIX 3: DEFINITIONS OF RATIOSAsset Quality Loan Loss Reserve Loan Loss Reserve / Gross Loans = 100 Loans + Loan Loss ReserveLoan Loss Reserve Loan Loss Reserve / Impaired Loans = 100Impaired Loans Impaired Loans Impaired Loans / Gross Loans = 100 Loans + Loan Loss ReserveLoan Loss Provisions Loan Loss Provisions / Net Interest Revenue = 100 Net Interest Revenue Capital AdequacyTier 1 Capital Tier 1 Capital / Risk - weighted Assets = 100 Risk - weighted AssetsTotal Capital Total Capital / Risk - weighted Assets = 100 Risk - weighted Assets Equity Equity / Total Assets = 100 Total Liability & Equity Profitability and EfficiencyNet Interest Revenue Net Interest Margin = 100 Total Earning Assets Net Income Return on Average Assets = 100 Total Average AssetsNet Income Return on Average Equity = 100 EquityOverheads Expense Ratio = 100 Net Interest Revenue + Other Operating Income LiquidityDue from Banks Interbank Ratio = 100Due to BanksLoans Net Loans / Total Assets = 100Total Assets 16. Loans Net Loans / Deposits & Short - term Funding = 100 Customer & Short - term FundingLiquid Assets Liquid Assets / Deposits & Short - term Funding = 100 Customer & Short - term Funding