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The past financial year marked a turning point for the global banking sector. Central banks across the world have tightened monetary policy after a decade of low-to-negative interest rates and in response to several shocks, including a rebound in aggregate demand since the Covid-19 pandemic, supply chain shocks, the war in Ukraine and spiralling inflation.
Higher interest rate environments are usually positively correlated with bank profitability. Indeed, the recent interest rate hikes have played out in banks’ favour. However, these changes also presented challenges, with alternate financial flows impacting balance sheets in a different way.
A quick look at the Top 1000 World Banks 2023 ranking, which is based on year-end 2022 results, suggests that the banking sector has not fared as well as would be expected.
Aggregate Tier 1 capital, total assets and pre-tax profits (PTP) are all down single-digit percentages, with PTP seeing the biggest decrease of 6.46% to $1.346tn.
The aggregate capital-to-assets ratio, which has seen a steady upward trajectory over the past decade, stands at 6.70%, but remains below the previous high of 6.75% in the 2019 ranking.
However, since the Top 1000’s results are denominated in US dollars, the data must be analysed in the context of a strong dollar appreciation. In 2022, the dollar gained 12% against the pound, 9% against the Chinese yuan and 7% against the euro, following several rate hikes by the US Federal Reserve.
While results in most countries seem lower when converted from national currency into dollars, there are a few exceptions. The Angolan kwanza, for example, strengthened almost 10% against the dollar in 2022 due to the rise in oil prices. Countries such as Jordan, Oman, Qatar, Saudi Arabia and the UAE peg their currencies to the dollar to avoid currency fluctuation and eliminate uncertainties in international transactions. The Brazilian real and the Mexican peso also outperformed the dollar.
The impact of the strong dollar has masked the continuing growth of the Chinese banking sector, albeit at a slower rate than the double-digit growth it has seen in previous years. When denominated in yuan, aggregate pre-tax profits for the Chinese banks in the ranking have increased by 4.74% and Tier 1 capital by 8.02%. With the US dollar exchange rate, however, China records declines of 4.5% and 1.29%, respectively.
Life at the top
China has the second-highest number of banks in this year’s ranking at 140, behind the US with 196. But China’s five megabanks — Industrial and Commercial Bank of China (ICBC), China Construction Bank, Agricultural Bank of China, Bank of China and Bank of Communications — dominate the rankings, making up half of the top 10 biggest lenders.
Given the steady expansion of the top Chinese lenders, the country may well occupy a sixth place in next year’s top 10, pushing out HSBC. The only European bank in the top 10 since 2012, the UK-based bank slides one position to 10th in this year’s ranking, overtaken by the Bank of Communications.
But it is ICBC that comes out on top as the biggest global lender for a record-breaking 11th year in a row. It reported $497.3bn in Tier 1 capital in 2022, as well as $5.67tn in total assets. To contextualise the scale of its business, ICBC has $3.4tn in total gross loans — more than the combined loan books of Deutsche Bank, UniCredit, Banco Santander and HSBC ($3.2tn).
While the Chinese banking sector’s robust growth has been trending for the past decade, the expansion is now taking a different shape as it is driven by medium-tier banks. In addition, profitability — measured by return on assets (ROA) and return on capital (ROC) — has diminished.
Looking at the top 20 Chinese banks by profit growth, it is mostly medium-tier banks that grew the quickest in 2022, following years where the expansion of the country’s banking sector was driven by its biggest banks. For example, Bank of Wenzhou, the regional commercial bank in 410th place, grew its assets by 15% to reach $58.6bn.
While the country’s banking assets have grown as a percentage of total global assets, from 13.98% in the 2013 ranking to 27.69% in this year’s ranking, ROA and ROC have decreased over the same period reaching the lowest levels in five years.
Beyond China, the Asia-Pacific region remains the banking sector’s greatest profit-generating engine, as it keeps increasing its weight in the ranking. In the 2023 ranking, the region has increased its share of global profits from 42.96% in 2022 to 45.49% this year. Western Europe has also slightly increased its share of profits, to 19.52%, while North America has seen its share contract, to 24.83%.
Vietnam, Indonesia, Malaysia, India and the Philippines are included in the cohort of top 10 countries for percentage increase in PTP. Vietnam’s PTP, for example, increased by 33.23%, while the Philippines’ profits growth was more modest at 9.88%. Asia-Pacific is also the region with the most banks in the ranking at 380, followed by Europe with 216, the same number of lenders as in last year’s ranking.
The number of US banks in the Top 1000 2023 ranking has increased by 10 to 196. Again, this is the result of the strong dollar, which has had a major impact on the ranking, in addition to the consolidation that the country’s banking sector has undergone in the past year.
Several banks have disappeared from the ranking as a result of the strong dollar. For example, only one bank from Sri Lanka, Bank of Ceylon, has appeared in the ranking this year, compared to four lenders in the 2022 ranking, given the currency devaluation the south Asian country experienced in 2022.
Other banks are not featured due to delayed reporting of audited financial statements, as was the case with the two biggest banks in Egypt: Banque Misr and National Bank of Egypt.
The 58% Egyptian pound devaluation in 2022 resulted in a double-digit decrease in Tier 1 capital for the country’s banks, aside from Arab African International Bank and Afreximbank. The latter increased its Tier 1 capital by 26.92% and total assets by 27.24%, following a $1.34bn capital increase in 2022.
Higher interest rates
Overall, banks have enjoyed a profitable 2022 as central banks around the world continued to hike interest rates, with the Bank of England being the first major central bank stepping in to curb inflation in December 2021.
Lenders had already started to recover profitability in 2021, after banks set aside billions of impairment charges in 2020 to address the impact of the Covid-19 pandemic.
At the end of 2022, net interest income (NII) — the difference between the income a bank earns from its lending activities and the interest it pays to depositors — had increased for many banks compared to the year prior. Lenders were quicker to increase interest rates on loans than to adjust the interest rates on customers’ deposits.
However, interest expenses, which represent the interest banks pay on any borrowings, such as bonds, loans, convertible debt or lines of credit, have been increasing at a faster rate than interest income. This suggests banks are facing higher funding costs in other instruments, rather than relying on deposits. This constitutes a potential vulnerability as it erodes NII and overall profitability in the long run. However, NII is higher overall and growing as part of total operating income.
NII might also be negatively affected by a decrease in deposits. Retail deposits, for example, have been relatively stable in 2022, while deposits from corporates have proved to be more sensitive to the increase in interest rates. Corporate deposits have been quicker to move from banks’ balance sheets in search of better returns. In the medium term, banks will be pushed to fund loans with more expensive securities.
The US, Canada and the UK show a decrease in deposits in this year’s ranking, while France, Germany and Spain have increased their total deposits. China also saw a dip in aggregate deposits, albeit by less than 1%.
In some countries, the drop in deposits was counterbalanced by an increase in securities, such as senior debt or subordinated debt. In the US, for example, deposits dropped 1.61%, while senior debt increased by 1.43%.
This trend can be observed at banks in several regions, testifying to what is becoming a global trend.
The banks that saw a significant change in their compositions of total liabilities, including an increase in securities, include the US’s PNC Financial Services Group and Bank of New York Mellon; Brazil’s Caixa Econômica Federal and Banco Bradesco; Japan’s Mitsubishi UFJ Financial Group (MUFG); and Canada’s Toronto Dominion Bank. Credit Suisse saw the biggest change, with a 7.42% decrease in deposits and an 8.8% increase in securities between 2021 and 2022.
Profitability
With regards to profitability, ROA worldwide slid from 0.75% in the 2022 ranking to 0.71% in 2023. The ratio is used to measure how well a bank is using its assets to generate income, indicating the per-dollar profit it earns on its assets. Latin America, Africa and the Middle East achieve the highest ratios in this year’s ranking, at 1.44%, 1.49% and 1.42%, respectively.
Higher profitability in emerging markets is explained by several factors, such as banks primarily relying on local deposits with a relatively low dependence on foreign wholesale funding. It also helps that they operate in less competitive markets.
North America attained a ROA of 0.96%, which is higher than both China (0.78%) and western Europe (0.49%).
On aggregate, non-interest income, which includes fees and commissions, trading revenue and other operating income, has decreased by 6.4% compared to the previous ranking. As a percentage of the total operating income, non-interest income has lost 268 basis points (bps), while NII has increased by 331bps. Therefore banks' profitability has benefited more from the lending business.
Minimum core capital and total assets
Tier 1 capital, an important measure of a bank’s financial strength, has been on an overall upward trajectory over the past decade, despite dipping twice in 2015 and 2020. While the minimum Tier 1 capital for a bank to be included in the Top 1000 was $342m in 2013, it had reached $556m in the 2022 ranking. This year’s ranking sees the smallest increase of just $1m, to $557m.
As of the end of 2022, the total value of the eurozone’s banking sector assets amounted to $28.2tn, which is more than their US peers’ $21.8tn. European lenders have traditionally been more focused on deposit-taking and lending activities, rather than investment banking, which explains the large size of the region’s assets compared to its profits. PTP in Europe stood at $172bn in 2022 — much lower than the US’s PTP of $265bn.
Liquidity issues in Europe
European banks faced a liquidity squeeze throughout 2022, with cash and balances at central banks shrinking by 17.34%. There was a 10.63% reduction in high-quality liquid assets and a 41.66% drop in deposits at the European Central Bank (ECB).
The liquidity squeeze was mostly related to the winding down of the ECB’s targeted longer-term refinancing operation (TLTROs), originally launched as a response to the European sovereign debt crisis. The programme was aimed at stimulating lending to the real economy by offering banks long-term, cheap funding. Many banks deposited unused TLTRO funds at the ECB at higher rates than at which they borrowed.
Thanks to the programme, eurozone banks reached historically high levels of liquidity, surpassing the 100% minimum liquidity coverage ratio set by the ECB. In 2022, the ECB started raising borrowing costs on these loans, incentivising banks to devolve the funds.
The need to replace some of that lost liquidity will push lenders to take on other, more expensive sources of funding, including bond issuance. It will also make lenders compete more aggressively for customers’ deposits as a way to gain a cheaper source of funding.
In 2022, gross total deposits decreased by 3.41% on a yearly basis, with the highest drops in the UK, Sweden and Switzerland. In the near future, further deposit outflows might also be triggered by interest rate risk, whether real or perceived.
Over the past year, European banks have been more cautious with their lending expansion as a result of economic uncertainty. On aggregate, the largest bank in each of the five leading western European markets — France, Germany, Italy, Spain and the UK — decreased total loans 3.3% year on year. HSBC reported the highest drop at 8.69%.
Improvements in Greece and Italy
Within Europe, Greek and Italian banks have performed well in 2022, despite the issues both sectors experienced in the past.
Greece’s Piraeus Financial Holdings and Alpha Bank top the table of the biggest movers from loss to profit, followed by Malaysia’s AmBank Group. Both Greek lenders recovered about $4bn in PTP. The other two Greek banks in the Top 1000 ranking, Eurobank Holdings and National Bank of Greece, increased their PTP by 236.28% and 44.63%, respectively. Profits for the lenders followed two loss‑making years.
After a decade-long financial crisis that shrank the economy, the Greek banks have been strengthened by their bad loan reduction schemes. The non-performing loans ratio for the banking sector as a whole declined to 8.7% as of December 2022, according to the Bank of Greece, although it remains significantly above the corresponding average of 2.28% of the countries under the European banking supervision.
Aside from asset quality improvement, deposits have been recovering and lenders have also been able to support their liquidity through their renewed access to the interbank market, lost during the crisis, and to international markets. However, the Greek banking sector remains smaller than before the 2008 crisis. Between 1996 and 2008, the number of Greek banks in the ranking would swing between six and nine, as opposed to the four that have appeared in the ranking since 2020.
Italy, with 21 banks in the ranking, tops the list of countries with the greatest increase in PTP, with a 54.91% boost. UniCredit, the largest Italian bank, expanded its PTP in 2022 by 450.97%, to $7.76bn, delivering what it described as its best results in more than a decade. This was achieved despite booking a negative impact of $234m from its Russian subsidiary on its full-year net profit.
Most of the Italian banks in this year’s ranking reported an expansion in PTP. Iccrea Banca, the co-operative banking group, clocked a 300% increase in PTP, to $2.15bn. Mediocredito Centrale moved from loss to profit; however, Banca Monte dei Paschi di Siena moved from profit to loss.
Many Italian banks also recorded a good performance in terms of ROA. At Iccrea Banca, Mediobanca, Banca IFIS, Fineco, Banca Generali, and Illimity Bank the ROA was equal to or above 1%. As a comparison, all Spanish banks reported ROAs below 1%.
India and Brazil on the rise
Indian banks did well after a few tough years, prior to and including the Covid-19 pandemic. The country’s banking sector has managed to come through the worst of it, with its banks cleaning up their balance sheets and growing Tier 1 capital and assets.
Aggregate PTP was negative for the Indian bank banking sector in the 2018 and 2019 Top 1000 rankings, but expanded to $30.6bn in 2022 and has reached $40bn in this year’s ranking.
India increases its weight in the 2023 ranking, adding two banks to reach a total of 27. Only Axis Bank and Yes Bank saw a decrease in PTP, while many of their peers recorded double-digit PTP growth. Just two lenders saw a decrease in Tier 1 capital, with the drop being less than 3%. South Indian Bank and RBL Bank are among the top 10 banks globally that made the biggest move from loss to profit.
Brazilian banks have also performed well, in most cases seeing a double-digit growth in Tier 1 capital. The Brazilian real outperformed the US dollar and the country’s economy gained ground in 2022.
The real had one of the best performances in 2022, gaining 6.45% in value against the dollar since the beginning of the year. In addition, the strong export performance benefited from higher commodity prices. As such, Brazilian lenders’ revenue momentum remained robust in 2022. The country’s economic performance supported business volumes and lending growth. Rising interest rates, in general, supported net interest margins and banks’ income.
Five of the 14 banks in the ranking increased their PTP by more than 40%. For example, government-owned Banco do Brasil’s PTP jumped 70.67%. Only two Brazilian lenders — Banco Bradesco and Banco Inter — experienced a drop in Tier 1 capital in 2022.
These good results were not impacted by the provisions for credit losses that some of Brazil’s largest lenders booked after the demise of Americanas, the retailer that filed for bankruptcy in January 2023, following accounting inconsistencies of more than $4.2bn.
The 2023 ranking also sees new Brazilian entrants, including challenger bank Nubank and two co-operative financial institutions, Banco Cooperativo Sicredi and Bancoob, a testament to the strength of the co-operative sector in the South American country.
M&A deals in 2022
Most of the merger and acquisition (M&A) activity in 2022 involved US community banks. Of the 21 deals completed in 2022 by banks in the Top 1000, 11 concerned US-based banks, according to Dealogic.
The largest M&A deal by value was in the Middle East. Kuwait Finance House completed its acquisition of Bahrain-based Ahli United Bank, creating one of the largest banks in the Gulf region in a deal valued at $11.2bn.
The next biggest deal was in Egypt, with Banque du Caire purchasing Banque Misr, followed by the acquisition of KBC Bank Ireland by Bank of Ireland.
While much smaller by value, MKB Bank’s $757m acquisition of state-owned Budapest Bank, to form MBH Bank, was important for the Hungarian banking sector. Back in 2020, the country’s prime minister Viktor Orban declared a three-way merger (Budapest Bank, MKB Bank and savings group Takarekbank) to boost the competitiveness of the national banking sector. The consolidation forms the second-largest banking group in Hungary.
More consolidation in the banking sector could take place as many small and medium-sized banks face increasing competition for customers and rising funding costs. This is particularly true for the US banking sector, as further mergers become increasingly likely following the collapse of Silicon Valley Bank, Silvergate Bank and Signature Bank in March.
The nervousness around the country’s regional banks has already resulted in an outflow of deposits, which may also propel M&A activity.
Mixed results for neobanks
This year’s ranking also sees several challenger banks entering the Top 1000 for the first time. Brazilian Nubank is joins the ranking in 831st position, with $916m in Tier 1 capital, while the UK’s Monzo Bank joins in 885th spot, with $767m.
The challenger banks in this year’s ranking recorded a mixed performance in terms of PTP and total assets. Nubank, for example, reported a 96.26% jump in Tier 1 capital, the fifth-biggest leap in the Top 1000; however, it also reported the ninth-biggest loss at $306m. Monzo saw a 136.42% increase in Tier 1 capital and a $159m loss.
Chinese neobank WeBank, whose largest shareholder is conglomerate Tencent, had a good performance with a 19.69% increase in Tier 1 capital and 19.65% increase in PTP. It has gained 47 positions in this year’s ranking, placing 284th. Compatriot XW Bank recorded a 20.81% drop in PTP, despite expanding its asset base by 35.33%, while MYBank saw a 5.6% drop in total assets while growing pre-tax profits by 59.33%.
Canada’s Equitable Bank is also performing well, jumping 130 positions to 536th position, following a 42.02% surge in Tier 1. Despite this, it saw a 10.48% decrease in PTP. And US-based Green Dot Corporation reported a 31.74% increase in PTP and a 3.78% rise in core capital.
But it is bad news for Klarna Bank, which clocked up its biggest annual loss so far at $981m. The buy now, pay later fintech with a banking licence last posted a profit in 2018.
Banks’ employees
Over the past few years, the global banking industry has made efforts to rationalise operations by closing branches and reducing staff numbers, despite many being reluctant to slash jobs during the Covid-19 pandemic. But the waves of rationalisation have begun to ebb in Europe.
Looking at the biggest lender in each western European country, there has been an aggregate 1.50% increase in the number of employees, totalling 1,068,458 at the end of 2022. Only seven of these 19 banks saw their workforce numbers shrink. Bank of Cyprus saw the biggest decrease (15.97%), followed by UniCredit (4.49%) and Caixa Geral de Depósitos (2.55%). Crédit Agricole’s decrease in staff numbers was just 1.24%, while it was less than half a percentage point for HSBC and ING.
Liechtenstein-based private bank LGT Group saw the biggest headcount increase, of 19.42%, following its acquisition of Australian wealth manager Crestone and the Indian wealth management business of Validus Wealth. Malta’s Bank of Valletta and DNB Group, Norway’s biggest bank, also increased their staffing levels by 17.22% and 10%, respectively.
The lenders with the largest headcounts in western Europe are HSBC and Santander, with more than 200,000 staff each, and Crédit Agricole, which has more than 100,000 employees.
Despite the slight increase in 2022, the reduction trend in employee numbers comes into sharper focus by looking a few years back. Bank employees in the UK dropped from 766,636 in 2013 to 591,435 in 2022. In France, the numbers declined from 708,428 to 670,957 over the same period. Spain was the only major European country to see an increase, from 380,830 to 426,290.
Challenges ahead
The last financial year has been generally positive for lenders worldwide. However, the boost to profitability from higher margins may prove transitory, as all banks face a long-term slowdown and other macroeconomic challenges.
There are continued risks around inflation and increasing economic uncertainty in many markets. The baseline forecast is for global gross domestic product growth to fall from 3.4% in 2022 to 2.8% in 2023, according to the International Monetary Fund. Advanced economies are expected to see a more notable slowdown, from 2.7% in 2022 to 1.3% in 2023.
Given the tougher operating environment, loan growth is likely to remain subdued as banks are expected to remain cautious in their lending decisions, particularly in the sectors that are most exposed to an economic downturn. The slowing economy and high monetary policy rates will contribute to weigh on credit demand.
In some sectors, like commercial or residential real estate, customers are more sensitive to interest rates and potential risks may arise with regards to the deterioration of asset quality.
The pressure to increase deposit costs, which was minimal in 2022, will increase in 2023 as depositors become more selective in search of higher yields. Banks will be competing for deposits as other forms of bank funding become more expensive.
Despite all these caveats, the composition of loan book and allowances is strong compared to the global financial crisis in 2008, for example, and lenders seem ready to face a potential downturn.
