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As the dust starts to settle, which banks deserve the most plaudits?
Economist Staff, The Economist
May 22, 2009
Trying to work out which banks are the world's best is a bit like awarding the prize for prettiest war-torn village. It is a title that carries little kudos. It is also likely to prompt further shelling. Winners of industry awards in the past three years include Ken Lewis, the chief executive of Bank of America, for banker of the year (2008); Société Générale for its risk management; and Angelo Mozilo of Countrywide, a failed mortgage lender, for a "lifetime of achievement."
Still, the question is becoming more pertinent. After months of indiscriminate fear, widespread losses, and government hand-holding, the banking industry is gradually stabilizing. Money markets are steadily calming. American banks that got a clean bill of health in this month's stress tests are queuing up to repay government money. A first wave of escapees is likely to include Goldman Sachs, Morgan Stanley, and JPMorgan Chase. Those banks that emerge from this crisis with reputations and franchises strengthened will find it increasingly easy to raise funds, win clients, attract employees, and buy assets.
Plenty of institutions have come through the crisis relatively unscathed. The Chinese banks now dominate rankings by market capitalization. Standard Chartered, an emerging-markets lender, seems to be steering a deft course through the downturn in the developing world. Rabobank, a wonderfully dull co-operative bank in the Netherlands, is the only bank that can still boast a AAA rating from Standard & Poor's. Bank of New York Mellon, a large custodian, has won lots of new business from belatedly risk-averse clients. But to win the shiniest medals, you need to have come under fire. In the heat of battle, which banks have come off best?
Working out the answer is trickier than it looks. Independence from the government is one marker of success, yet America's largest banks were given little choice but to take government capital in October. In Europe some avoided state cash by treating existing shareholders badly: witness the money that Barclays hurriedly raised from Middle Eastern investors last year. And lowish credit-default-swap spreads on banks such as Deutsche Bank and Credit Suisse partly reflect the assurance of government help if needed.
Share prices offer another perspective. Every bank investor has been hammered in the past two years, of course, but some have done much better than others. Investors in Citigroup and Royal Bank of Scotland have been all but wiped out. Even the best performing big banks have lost a third of their value in that period. Over a longer time frame, from the start of the bubble to the present, only a handful of the big firms have delivered capital gains for their investors. They include Goldman Sachs, Credit Suisse, BNP Paribas of France, and Banco Santander of Spain.
But share prices are also imperfect gauges of bank performance. During the boom investors rewarded growth, whether it was sustainable or not. Banks that avoided the stampede into credit in the go-go years grumble, with some justice, that they were punished for their conservatism. Continuing volatility in share prices partly reflects deep uncertainty over banks' future earnings power.
The league table of industry write-downs and credit losses is another indicator. There is red ink everywhere but some have spilled much more than expected. HSBC has lost $42.2 billion to date, most of it thanks to its disastrous foray into America's subprime-mortgage market. The bank is otherwise well run, with a conservative approach to funding that has served it well, but it has lost more to date than the likes of Royal Bank of Scotland, now largely in the hands of the state, and JPMorgan Chase, which has far more exposure to both America and investment banking. That is hard to forgive.
Success can also be judged by how well banks have positioned themselves for the future. Just surviving has been smart. The likes of Deutsche and Credit Suisse have not needed to do huge deals to produce bumper earnings in the first quarter. But many banks have splashed out during the crisis, with strikingly varied results. Bank of America's purchase of Merrill Lynch and Lloyds TSB's takeover of HBOS have been horror stories. Wells Fargo has done better with its purchase of Wachovia, but decent longer-term prospects cannot obscure the fact that a generous stress-test process still required it to raise more capital. BNP's tortuous capture of Fortis gives it the euro area's biggest deposit-taking franchise. But the dealmaking baubles go to Barclays for its cut-price acquisition of Lehman's North American business; to JPMorgan Chase for its swoops on Bear Stearns and Washington Mutual; and to Santander for emerging from the ABN AMRO transaction, which killed off RBS and Fortis, with a big presence in Brazil at a fair price.
However the pack is shuffled, a few names keep resurfacing-in America, Goldman Sachs and JPMorgan Chase; and in Europe, Credit Suisse, Deutsche, BNP, Barclays and Santander. They can be whittled down further. In Europe, concerns over what lies on the balance-sheets of Deutsche and Barclays are ebbing but are not gone. The British bank's willingness to consider a sale of BGI, its asset-management arm, suggests worries over capital. Both banks still have lots of legacy assets, many of them tucked in the banking book.
Santander should rightfully take its bow alongside its regulators, who closed off the capital benefits of building up big off-balance-sheet positions and required Spanish banks to put aside provisions during the upswing. BNP has played its hand very well, but its business mix (a stable home market and a focus on equity derivatives) helped massively by keeping it away from the worst blow-ups.
In America, Goldman still has legions of admirers. It has posted losses of less than $8 billion to date, a performance not nearly as bad as those of its direct peers. Its focus on risk management is a template for others to follow. But its renewed swagger should not conceal the fact that it needed to convert into a bank-holding company in order to survive the market storm-nor the questions that hang over its future earnings in a re-regulated industry.
That leaves Credit Suisse and JPMorgan Chase to take the grand prizes. Credit Suisse has had its share of mishaps during the crisis but it was quick to scale down its balance-sheet, has plotted a credible strategy for its investment bank and pulled well ahead of UBS, its main rival in wealth management. As for JPMorgan Chase, it has kept a tight rein on risk, managed capital well and acquired sensibly. None of this is much comfort for weary Swiss and American taxpayers, of course. Well-run or not, both banks present the problem of being far too important to fail. And that's to say nothing of the curse of awards.