an overview of the world's largest banks ht

8/6/2019 An Overview of the World's Largest Banks HT

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An Overview of the Worlds Largest Banks

By 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-

[email protected] corrections, comments and suggestions for improvement.
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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Banks provides the world with liquidity the ability to exchange ownership claims withminimal cost. When we lend money to non-financial corporations, we are conscious oflending. But when depositors lend money to banks, they believe that they have money inthe bank. Banks debts are defined as societys money the most liquid asset most membersof 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. Mostjurisdictions define banks as those institutions that take deposits and make payments onbehalf of customers through payments systems. In some jurisdictions, banks are also definedby their lending power.

In addition to providing legally defined banking services, banks lend, manage financialassets, and make and service markets. They provide trust and investment banking services underwriting, issuing, and making markets in securities and advising companies as to howthey 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 areregulated by banking, securities markets, insurance and pension fund regulators. The criticalnature 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 notexplicitly) guaranteed by governments. This assumption, in turn, feeds the need forregulation.

Banks liquidity, market making, market servicing, information processing and otherintermediation services evidence large economies of scale. The importance of reputation in

provision of these services and the implicit government guarantees of the largest banksincreases 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. These100 banks include over 67 percent of the worlds banking assets [measured by the assets ofthe worlds largest 1000 banks]. Within the top 100 banks, there is also substantialconcentration, with the top 20 banks accounting for 50 percent of profit and 45 percent of theaggregate 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 andinstruments succumb to globalization.

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Table 1: The 100 Largest Banks in the World by the Book Value of Equity Capital

Rank Bank Name Country Continent

Tier1Capital%

Cumulative%

TotalAssets%

Cumulative%

Pre-taxprofit%

Cumulative%

1 Citigroup USA North America 4.15% 4.15% 3.41% 3.41% 6.42% 6.42%

2 JP Morgan Chase & Co. USA North America 3.83% 7.98% 2.66% 6.06% 1.65% 8.08%

3 HSBC Holdings PLC Hong Kong Asia 3.75% 11.73% 2.93% 9.00% 4.68% 12.75%

4 Bank of America Corp USA North America 3.59% 15.32% 2.55% 11.54% 5.64% 18.39%

5 Credit Agricole France Europe 3.54% 18.85% 2.85% 14.40% 2.77% 21.16%

6 Royal Bank of Scotland UK Europe 2.44% 21.30% 2.57% 16.97% 3.55% 24.71%

7 Mitsubishi Tokyo Financial Group Japan Asia 2.23% 23.53% 2.25% 19.22% 1.62% 26.33%

8 Mizuho Financial Group Japan Asia 2.17% 25.69% 2.98% 22.19% 2.33% 28.67%

9 HBOS UK Europe 2.04% 27.74% 1.74% 23.94% 2.36% 31.02%

10 BNP Paribas France Europe 1.99% 29.73% 2.83% 26.77% 2.75% 33.77%11 Bank of China China Asia 1.94% 31.67% 1.18% 27.96% 1.11% 34.88%

12 Santander Central Hispano Spain Europe 1.86% 33.53% 1.80% 29.76% 1.60% 36.48%

13 Barclays Bank UK Europe 1.79% 35.32% 2.28% 32.03% 2.36% 38.85%

14 Rabobank Group Netherlands Europe 1.72% 37.04% 1.49% 33.52% 1.02% 39.86%

15 Sumitomo Mitsui Financial Group Japan Asia 1.70% 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 Europe 1.61% 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 UBS Switzerland Europe 1.53% 45.09% 3.52% 43.14% 2.51% 48.13%

20 ABN AMRO Bank Netherlands Europe 1.51% 46.59% 1.90% 45.05% 1.97% 50.10%

21 Deutsche Bank AG Germany Europe 1.42% 48.01% 2.63% 47.67% 1.46% 51.56%

22 Groupe Caisse d'Epargne France Europe 1.40% 49.41% 1.70% 49.37% 0.87% 52.43%

23 Societe Generale France Europe 1.39% 50.81% 1.88% 51.25% 1.83% 54.27%

24 Credit Mutuel France Europe 1.38% 52.19% 1.21% 52.46% 0.95% 55.22%

25 China Construction Bank China Asia 1.31% 53.50% 1.08% 53.55% 1.61% 56.83%

26 Lloyds TSB Group UK Europe 1.26% 54.76% 1.24% 54.79% 1.79% 58.62%

27 Credit Suisse Group Switzerland Europe 1.21% 55.98% 2.21% 57.00% 1.95% 60.57%

28 UFJ Holdings Japan Asia 1.20% 57.18% 1.68% 58.68% -0.58% 59.99%

29 HypoVereinsbank Germany Europe 1.19% 58.37% 1.46% 60.14% -0.82% 59.16%

30 Banca Intesa Italy Europe 1.18% 59.56% 0.86% 61.00% 0.95% 60.12%

31 Metlife USA North America 1.17% 60.73% 0.82% 61.81% 1.04% 61.16%

32 Industrial & Commercial Bank of China China Asia 1.13% 61.85% 1.57% 63.39% 0.09% 61.25%

33 Banco Bilbao Vizcaya Argentaria Spain Europe 1.12% 62.97% 0.97% 64.36% 1.50% 62.75%

34 Fortis Bank Belgium Europe 1.09% 64.06% 1.51% 65.87% 0.96% 63.72%

35 Norinchukin Bank Japan Asia 1.03% 65.09% 1.27% 67.15% 0.48% 64.19%

36 Groupe Banques Populaires France Europe 1.02% 66.11% 0.78% 67.93% 0.76% 64.95%

37 Agricultural Bank of China China Asia 0.93% 67.04% 0.97% 68.90% 0.22% 65.17%

38 Washington Mutual USA North America 0.91% 67.95% 0.71% 69.60% 1.23% 66.40%

39 UniCredito Italiano Italy Europe 0.90% 68.85% 0.83% 70.44% 1.21% 67.61%

40 National Australia Bank Australia Australia 0.84% 69.69% 0.65% 71.08% 0.90% 68.51%

41 Dexia Belgium Europe 0.84% 70.53% 1.22% 72.30% 0.80% 69.31%

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Rank Bank Name Country ContinentTier1Capital%

Cumulative%

TotalAssets%

Cumulative%

Pre-taxprofit%

Cumulative%

42 SanPaolo IMI Italy Europe 0.83% 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 Sweden Europe 0.81% 72.98% 0.86% 74.27% 0.93% 72.64%

45 Commerzbank Germany Europe 0.80% 73.78% 1.33% 75.60% 0.30% 72.94%

46 Scotiabank Canada North America 0.79% 74.56% 0.51% 76.11% 0.86% 73.80%

47 MBNA Corp USA North America 0.78% 75.34% 0.14% 76.25% 1.10% 74.89%

48 KBC Bank Belgium Europe 0.74% 76.09% 0.78% 77.03% 0.88% 75.77%

49 Royal Bank of Canada Canada North America 0.74% 76.83% 0.80% 77.83% 0.92% 76.69%

50 Bayerische Landesbank Germany Europe 0.72% 77.55% 1.02% 78.85% 0.22% 76.90%

51 Caja de Ahorros y Pen. De Barcelona - La Caixa Spain Europe 0.64% 78.19% 0.35% 79.20% 0.42% 77.32%

52 DZ Bank Deutsche Zentral Germany Europe 0.64% 78.83% 1.11% 80.31% 0.41% 77.73%

53 Danske Bank Denmark Europe 0.64% 79.47% 0.87% 81.19% 0.71% 78.44%

54 Resona Holdings Japan Asia 0.62% 80.09% 0.85% 82.03% 0.96% 79.40%

55 Bank of Montreal Canada North America 0.62% 80.70% 0.49% 82.52% 0.74% 80.15%

56 Landesbank Baden-Wurttemberg Germany Europe 0.61% 81.31% 1.06% 83.58% 0.35% 80.50%

57 Toronto-Dominion Bank Canada North America 0.58% 81.89% 0.57% 84.16% 0.70% 81.20%

58 Countrywide Financial Corporation USA North America 0.58% 82.47% 0.30% 84.45% 0.96% 82.15%

59 Canadian Imperial Bank of Commerce Canada North 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 Group Australia Australia 0.54% 84.66% 0.41% 86.06% 0.76% 85.25%

63 Dresdner Bank Germany Europe 0.52% 85.18% 1.64% 87.69% -0.02% 85.23%

64 Capitalia Gruppo Bancario Italy Europe 0.48% 85.66% 0.42% 88.11% 0.31% 85.54%

65 Commonwealth Bank Group Australia Australia 0.48% 86.15% 0.46% 88.57% 0.70% 86.24%

66 Fifth Third Bancorp USA North America 0.48% 86.62% 0.22% 88.79% 0.59% 86.84%

67 Allied Irish Banks Ireland Europe 0.47% 87.09% 0.32% 89.11% 0.51% 87.35%

68 HSH Nordbank Germany Europe 0.47% 87.56% 0.51% 89.62% 0.25% 87.61%

69 Banca Monte dei Paschi di Siena Italy Europe 0.46% 88.02% 0.40% 90.02% 0.26% 87.87%

70 Capital One Financial Corporation USA North America 0.45% 88.48% 0.12% 90.15% 0.63% 88.50%

71 Nykredit Group Denmark Europe 0.45% 88.93% 0.39% 90.54% 0.21% 88.71%

72 Eurohypo Germany Europe 0.45% 89.38% 0.71% 91.25% 0.22% 88.93%

73 Sumitomo Trust & Banking Japan Asia 0.45% 89.83% 0.33% 91.58% 0.39% 89.32%

74 Standard Chartered UK Europe 0.44% 90.27% 0.33% 91.91% 0.57% 89.90%

75 Golden West Financial Group USA North America 0.44% 90.71% 0.25% 92.15% 0.55% 90.44%

76 Kookmin Bank Korea Asia 0.44% 91.14% 0.41% 92.56% 0.23% 90.67%

77 Shinkin Central Bank Japan Asia 0.43% 91.58% 0.60% 93.15% 0.13% 90.81%

78 Westpac Banking Corporation Australia Australia 0.43% 92.01% 0.39% 93.55% 0.66% 91.47%

79 Svenska Handelsbanken Sweden Europe 0.42% 92.43% 0.47% 94.01% 0.52% 91.99%

80 Bank of Ireland Ireland Europe 0.42% 92.85% 0.35% 94.37% 0.46% 92.45%

81 DnB NOR Group Norway Europe 0.42% 93.26% 0.27% 94.64% 0.43% 92.89%

82 Caja de Ahorros y Monte de Piedad de Madrid Spain Europe 0.40% 93.67% 0.27% 94.91% 0.32% 93.21%

83 DBS Bank Singapore Asia 0.40% 94.07% 0.25% 95.16% 0.41% 93.62%

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Rank Bank Name Country ContinentTier1Capital%

Cumulative%

TotalAssets%

Cumulative%

Pre-taxprofit%

Cumulative%

84 John Hancock Holdings (Delaware) USA North America 0.40% 94.47% 0.23% 95.39% 0.24% 93.86%

85 KeyCorp USA North America 0.39% 94.85% 0.21% 95.60% 0.37% 94.23%

86 Skandinaviska Enskilda Banken Sweden Europe 0.37% 95.23% 0.55% 96.15% 0.37% 94.60%

87 BB & T Corp USA North America 0.37% 95.60% 0.23% 96.38% 0.62% 95.22%

88 BNL-Banca Nazionale del Lavoro Italy Europe 0.37% 95.97% 0.25% 96.63% 0.02% 95.24%

89 ForeningsSparbanken (Swedbank) Sweden Europe 0.36% 96.33% 0.35% 96.98% 0.48% 95.71%

90 Banco Popular Espanol Spain Europe 0.35% 96.68% 0.20% 97.18% 0.47% 96.18%

91 Bank of New York USA North America 0.34% 97.02% 0.22% 97.39% 0.59% 96.77%

92 Shoko Chukin Bank Japan Asia 0.34% 97.36% 0.26% 97.66% 0.02% 96.79%

93 State Bank of India India Asia 0.33% 97.69% 0.33% 97.99% 0.50% 97.29%

94 Banco Itau Holding Financeira Brazil South America 0.33% 98.03% 0.11% 98.10% 0.74% 98.02%

95 Erste Bank Austria Europe 0.33% 98.36% 0.44% 98.54% 0.38% 98.41%

96 Norddeutsche Landesbank Girozentrale Germany Europe 0.33% 98.69% 0.62% 99.16% 0.11% 98.52%

97 Mitsui Trust Holdings Japan Asia 0.33% 99.02% 0.27% 99.43% 0.37% 98.89%

98 Regions Financial Corp USA North 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 Group USA North 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 bothtier 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 fortwo reasons: first, the degree of banking concentration is lower in the US than elsewhere inthe 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 ofthe world.

1

The Basel Accord definition of core equity capital for minimum regulatory capital requirements being the sumof common shareholders' equity common shares, contributed surplus, retained earnings, non-cumulative

preferred shares plus minority interests in subsidiaries from Tier 1 capital minus goodwill.

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Figure 1: Concentration of Capital, Assets and Profits by Territory

25%

42%

33%

23%

59%

18%19%

47%

35%

0%

10%

20%

30%

40%

50%

60%

70%

Asia & Australia Europe North America

Tier 1 Capital Total Assets Pre-tax Profit

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 aredifferent from non-financial institutions. Banks largest asset categories are loans. Theymaintain a large amount of liquid assets and their fixed assets comprise less than one percentof 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 andliabilities would be operating dangerously, but the short term liabilities of banks, theirdeposits, 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 equityratios of over two are viewed as risky. Banks are able to leverage themselves to such a greatextent 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 differencebetween interest received on loans and interest paid out on deposits and other funding. Butthey also have considerable fee income, from providing credit asset management andfinancial market related services to customers. Because banks lend to customers who maydefault on their debt, banks must make provisions for the possibility that loans will not berepaid. 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 ofnet income. The global economy in the year 2004 was stable and growing; hence, loan losseswere relatively moderate. When losses increase during recessions, provisions rise, oftendramatically.

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Table 2:Aggregate Financial Statements of the 100 Largest Banks in the World 2004

A. Balance Sheet

US$ billion % US$ billion %

Assets Liabilities & Equity

Liquid Assets 5,933 15 Deposits & Short-term Funding 28,616 70

Other Assets 15,053 37 Other Liabilities 10,295 25

Loans, Net 19,590 48 Total Equity 2,052 5

Fixed Assets 387 1

Total Assets 40,963 100 Total Liabilities & Equity 40,963 100

B. Income Statement

US$ billion %

Operating Income 1,191 100

Net Interest Revenue 620 52

Other Operating Income 571 48

Overheads 729 61

Loan Loss Provisions 98 8

Other -14 -1

Profit Before Tax 350 29

Tax 108 9

Net Income 243 20

Source: Bankscope database, Bureau Van Dijk Electronic Publishing.Note: see appendix 1 for definitions of accounts

The operations of the banks can be summarized through asset quality, capital adequacy,profitability, efficiency and liquidity ratios. We compare worldwide and regional ratios withthe five largest banks in the world. Data and ratio definitions are taken from Bankscope2.

Asset Quality

Asset quality is critical to banks, because credit risk the risk that loans will not be paid infull when due is the largest risk banks face. Banks carry their loans at their gross principalvalue reduced by reserves (or allowance for loan losses). There are two types of reserves.

General reserves are portfolio-wide, based on loan characteristics, managementexperience 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:

EADLGDPDEL =

where EL = expected losses in an amount of currency, PD = the probability of default, LGD

2Bankscope is a comprehensive, global database containing financial information on 24,000 public and private banks fromaround the world. It combines data from the main information provider, Fitch Ratings, and 6 other sources, with softwarefor searching and analysis.

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= 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 provide

additional 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 bebroken down into loan loss reserve to impaired loans and impaired loans to gross loans asfollows:

LoansGross

LoansImpaired

LoansImpaired

ReserveLossLoan

LoansGross

ReserveLossLoan=

The ratio of loan loss reserves to impaired loans measure the adequacy of reserves, withhigher ratios indicating greater conservatism. Impaired loans are loans with objectiveevidence that the bank is unlikely to recover the full amounts owing to total loans. Thehigher 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 conservatismand 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 lowreserves and high impaired loans.

Loan loss reserves are balance sheet asset contra accounts. Loan loss provisions (or chargesto income) are the income statement accounts that add annually to reserves. The ratio of loanloss provision to net interest revenue in the long run measures the percent of loan interest lostto credit risk. Banks lending to higher risk customers will charge higher levels of interest tooffset losses, increasing both the numerator and the denominator. But provisions tend to bevolatile from year to year, depending on the economy. Across the world, 16 percent of netinterest 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 UBSactually took a negative provision, reducing its level of loan loss allowances and increasingits income in the year because it concluded that its allowances understated the credit qualityof its portfolio. Both Citigroup and HSBCs relatively high loan loss provision reflect theirLatin American and consumer lending portfolios.

Capital Adequacy

Because equity capital is able to participate in losses, the greater is the equity capital of abank, the safer is the bank. But equity capital is more expensive than debt, so equity holdersand managers (who are hired to maximize the returns of equity holders) have an incentive to

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

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consensus as to minimum acceptable levels. Under the Basel Accords3 the ratios of tier 1capital to risk assets4 and total capital to risk assets must exceed 4% and 8% of risk assetsrespectively. These capital measures address the adequacy of a banks capital to cover bothon- and off-balance sheet credit risks. Virtually all banking jurisdictions in the worldsubscribe 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 ofrisk management than they would have been in the absence of the Accords and, as Tables 3and 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 riskassets ratio. The lower equity to total assets of Chinese, Japanese and European banksreflects their greater proportionate investment in lower risk-weighted assets (especiallygovernment bonds) compared with their North American competitors. Note that UBS has anequity to total assets ratio of 2.3 percent, while Citigroup and HSBC have equity levels ofover 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 Efficiency

Return 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 andrecovery 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 compositionsreflect different risk structures (see above), but also banks undertake risks not reflected intheir total assets at all. So unless one is confident that the risks booked by two different banksto generate returns are similar, one cannot draw meaningful conclusions from simple ROAnumbers. The higher efficiency suggested by Citigoups and HSBCs ROAs reflect thehigher 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 ofprofitability. Both North America and the rest of Asia achieve a net interest margin of 2.9percent. 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 thehigh margins of HSBC and Citigroup, well above the world average of 1.7, reflect in parthigher risk lending that achieves high spreads over cost of funds.

The expense ratio measures operational efficiency by comparing overheads to total revenues

3 The 1988 Capital Accord, entitled Basel Committee on Banking Supervision. International convergence ofcapital measurement and capital standards and subsequent amendments, is frequently referred to collectively asBasel I. In June 2004 the Basel committee released International convergence of capital measurement andcapital 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-weighted20 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.

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(the sum of net interest income and non-interest income). Wages make up the largest singleoverhead expense. According to this measure, China has the most efficient banks in theworld, reflecting in part its relatively low salary levels. By the same token, the poorerefficiencies 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.

Liquidity

We 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 threemeasures 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 otherbanks expressed as a percent. If one views customer deposits as core funding, a stable sourceof 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 interbankmarket all funds sourced from retail deposits not used to fund lending to the non-financialsector, and if banks source from the interbank market all funds in excess of their retaildeposits necessary to make loans, then the interbank ratio would be a sufficient statistic tomeasure 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 thebank is a net liquidity buyer. Within the largest banks of the world, the average interbankratio 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 thefunding necessary for their lending portfolios. In China, however, the large banks arecharacterized by large branch networks and place twice as many funds in the nascentrenminbi 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 hasan interbank ratio of nearly 200.

The two remaining ratios, loans to deposits and liquid assets to deposits (often called reservesto deposits) view all deposits as identical, whether they are retail or wholesale, customerdeposits or bank deposits. In the former ratio, all loans are considered equally illiquid and inthe 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, clearingdeposits 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 indicatelow liquidity. The world average of loans to deposits is 68.5 and liquid assets to deposits is21.0. The Australian banks appear to be the least liquid. UBS appears to be very liquid whenconsidering loans to assets but illiquid when considering liquid assets to deposits. Thiseffect,, however, is caused by marketable securities occupying a high portion of its assets. Asimilar 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 analystmust exercise caution in interpreting these and other ratios bearing in mind bank- andcountry-specific the portfolio composition, operations and environment.

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Table 3: Financial Ratios of Regional Bank Averages (2004)

China Japan Rest of

Asia

Europe North

America

Australia World

Average

Assets Quality

Loan Loss Reserve / Gross Loans 1.7 2.2 1.9 2.2 1.4 0.9 2.0

Loan Loss Reserve / Impaired Loans 11.0 64.6 112.8 77.8 185.0 255.9 70.0

Impaired Loans / Gross Loans 15.5 3.4 1.7 2.8 0.8 0.4 2.9Loan Loss Provisions / Net Interest Revenue 23.7 52.2 25.1 13.8 9.2 7.3 16.2

Capital Adequacy

Basel Tier 1 Capital / Risk Assets 8.5 5.8 8.6 8.2 9.7 7.3 8.1

Basel Total Capital / Risk Assets 10.1 11.1 11.9 11.6 13.4 10.2 11.8

Equity / Total Assets 3.8 4.0 7.6 4.1 8.2 7.3 5.0


Return On Average Assets 0.4 0.2 1.0 0.5 1.1 0.9 0.6

Return On Average Equity 11.6 4.6 12.6 12.0 13.6 12.9 11.8

Net Interest Margin 2.2 1.0 2.9 1.3 2.9 2.3 1.7

Expense Ratio 45.1 54.1 51.5 63.7 63.8 56.7 61.2

Liquidity

Interbank Ratio 205.1 98.1 196.1 76.4 46.5 85.2 74.6

Net Loans / Deposits & Short-term Funding 65.3 62.1 74.8 68.4 70.0 100.6 68.5

Liquid Assets / Deposits & Short-term Funding 10.5 8.8 22.7 23.5 27.5 8.9 21.0

Table 4: Financial Ratios of the Largest Five Banks in terms of Assets (2004)

UBS Citigroup Mizuho HSBC Credit

Agricole

Assets Quality

Loan Loss Reserve / Gross Loans 1.9 1.9 1.8 1.9 3.1

Loan Loss Reserve / Impaired Loans 131.2 150.8 74.7 120.6 75.4

Impaired Loans / Gross Loans 1.5 1.3 2.4 1.5 4.0

Loan Loss Provisions / Net Interest Revenue -2.3 13.9 14.6 20.1 15.7

Capital Adequacy

Basel Tier 1 Capital / Risk Assets 11.8 8.7 6.2 8.9 7.9

Basel Total Capital / Risk Assets 13.6 11.9 11.9 12.0 10.4

Equity / Total Assets 2.3 7.5 3.6 7.8 5.3


Return On Average Assets 0.5 1.2 0.5 1.1 0.5

Return On Average Equity 21.3 15.6 14.4 13.9 8.5Net Interest Margin 1.1 3.7 0.9 3.1 1.2

Expense Ratio 73.3 65.4 56.9 53.9 72.1

Liquidity

Interbank Ratio 75.2 95.8 70.8 191.6 67.5

Net Loans / Deposits & Short-term Funding 22.7 73.7 57.7 76.4 68.4

Liquid Assets / Deposits & Short-term Funding 8.5 68.5 6.7 20.4 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

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APPENDIX 1:DEFINITION OF ACCOUNTS

Liquid AssetsCash and Due from BanksDeposits with BanksDue from Central BanksDue from Other BanksDue from Other Credit InstitutionsTrading SecuritiesGovernment SecuritiesOther BillsCDsTreasury Bills

Other AssetsListed SecuritiesEquity Investments

Investment SecuritiesNon-Listed SecuritiesOther SecuritiesBondsOther InvestmentsDeferred Tax ReceivableOther Non Earning AssetsIntangible Assets

Loans, NetHP / LeaseLoans to Other CorporateLoans to Group Companies / Associates

MortgagesLoans to Municipalities / GovernmentLoans to BanksTrust Account LendingOther LoansOverdue LoansRestructured LoansOther non-performing LoansLoan Loss ReservesLoan Loss Reserves (Previously Deducted)

Fixed AssetsLand and Buildings

Other Tangible Assets

Deposits & Short-term FundingDeposits - DemandDeposits - SavingsBanks DepositsMunicipalities / Government DepositsOther DepositsCertificates of DepositDebt SecuritiesCommercial PaperMortgage BondsConvertible Bonds

Other Negotiable InstrumentsOther Securities

Other BondsOther Funding

Other LiabilitiesOther LiabilitiesSubordinated DebtOther Non-equity ReservesGeneral Loan Loss Reserves

Total EquityHybrid CapitalMinority InterestsGeneral Banking RiskPreference SharesCommon Shares

Other Equity ReservesRetained Earnings

Net Interest RevenueInterest ReceivedInterest and dividends on debt securitiesInterest receivedOther dividend incomeInterest PaidInterest paid

Other Operating IncomeFees and commissions receivable

fees and commissions payableForeign exchange tradingSecurities tradingOther / Derivatives tradingSundry operating incomeInvestment securities gainsOther non-banking income

OverheadsPersonnel ExpensesAmounts written off fixed asset investmentsOther non-interest expensesDepreciation

Provisions for contingencies and commitments

Loan Loss ProvisionsSpecific loan loss provisionGeneral loan loss provision

OtherIncome from associates

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APPENDIX 2: NAME OF BANKS INCLUDED IN THE COMPUTATION OF REGIONAL

AVERAGES

Name of Banks Included in the Computation of

Regional Averages:

China

Bank of ChinaChina Construction BankIndustrial and Commmerical Bank of ChinaAgricultural Bank of China

Japan

Mitsubishi Tokyo Financial GroupMizuho Financial GroupSumitomo Mitsui Financial GroupUFJ Holdings

Norinchukin BankResona HoldingsSumitomo Trust & BankingShinkin Central BankShoko Chukin BankMitsui Trust Holdings

Rest of Asia

HSBC Holdings PLCState Bank of IndiaKookmin BankDBS Bank

Europe

Erste BankFortis BankDexiaKBC BankDanske Bank

Nykredit GroupCredit AgricoleBNP ParibasGroupe Caisse d'EpargneSociete GeneraleGroupe Banques PopulairesDeutsche Bank AG

HypoVereinsbankCommerzbank

Bayerische Landesbank

DZ Bank Deutsche Zentral-GenossenschaftsbankLandesbank Baden-WurttembergDresdner BankHSH NordbankEurohypo

Norddeutsche Landesbank GirozentraleAllied Irish BanksBank of IrelandBanca IntesaUniCredito ItalianoSanPaolo IMI

Capitalia Gruppo BancarioBanca Monte dei Paschi di SienaBNL-Banca Nazionale del LavoroABN AMRO BankRabobank GroupING BankDnB NOR GroupSantander Central HispanoBanco Bilbao Vizcaya ArgentariaCaja de Ahorros y Pen. De Barcelona - la CaixaCaja de Ahorros y Pen. De Barcelona - la Madrid

Banco Popular EspanolNordea GroupSvenska HandelsbankenSkandinaviska Enskilda BankenForeningsSparbanken (Swedbank)UBSCredit Suisse GroupRoyal Bank of ScotlandHBOSBarclays BankLloyds TSB GroupStandard Chartered

North America

ScotiabankRoyal Bank of CanadaBank of MontrealToronto-Dominion BankCanadian Imperial Bank of CommerceCitigroup

JP Morgan Chase & Co.Bank of America Corp

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Wells Fargo & Co.Wachovia CorporationWashington MutualU.S. BancorpMBNA Corp

Countrywide Financial CorporationNational City CorpSunTrust BanksFifth Third BancorpCapital One Financial CorporationGolden West Financial GroupKeyCorpBB & T CorpBank of New YorkRegions Financial CorpPNC Financial Service Group

Desjardins Group

Australia

National Australia BankANZ Banking Group

Commonwealth Bank GroupWestpac Banking Corporation

(Note: 4 of the top 100 institutions, includingCredit Mutuel of France, Metlife and JohnHancock of the U.S.A., Banco Itau HoldingFinanceira of Brazil, as listed in The Bankerssurvey have been excluded in the computation dueto unavailability of detailed information

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APPENDIX 3: DEFINITIONS OF RATIOS

Asset Quality

Loan Loss Reserve / Gross Loans = 100

ReserveLossLoanLoans

ReserveLossLoan

+

100LoansImpaired

ReserveLossLoanLoansImpaired/ReserveLossLoan =

100ReserveLossLoanLoans

LoansImpairedLoansGross/LoansImpaired

+

=

100RevenueInterestNet

ProvisionsLossLoanRevenueInterestNet/ProvisionsLossLoan =

Capital Adequacy

100Assetsweighted-Risk

Capital1TierAssetsweighted-Risk/Capital1Tier =

100Assetsweighted-Risk

CapitalTotalAssetsweighted-Risk/CapitalTotal =

100Equity&LiabilityTotal

EquityAssetsTotalEquity / =


100AssetsEarningTotal

RevenueInterestNetMarginInterestNet =

100AssetsAverageTotal

IncomeNetAssetsAverageonReturn =

100Equity

IncomeNetEquityAverageonReturn =

100IncomeOperatingOtherRevenueInterestNet

OverheadsRatioExpense

+

=

Liquidity

100BankstoDue

BanksfromDueRatioInterbank =

100

AssetsTotal

LoansAssetsTotal/LoansNet =


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100Fundingterm-Short&Customer

LoansFundingterm-Short&Deposits/LoansNet =

100Fundingterm-Short&Customer

AssetsLiquidFundingterm-Short&Deposits/AssetsLiquid =

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