Some Banks in Developing Markets Could Emerge as Global Challengers, BCG Report Finds

Banks in rapidly developing economies have greatly outperformed their

Western counterparts and are growing at a much faster rate

Mar 29, 2007, 01:00 ET from The Boston Consulting Group

    NEW YORK, March 29 /PRNewswire/ -- As banks in the so-called BRIC
 countries - Brazil, Russia, India, and China - become larger and more
 competitive, a few could emerge as challengers to leading Western players,
 says a new report by The Boston Consulting Group (BCG).
     Three Chinese companies now rank among the world's ten largest banks,
 all with market capitalizations of well over $100 billion. China's ICBC
 holds the number-two spot after raising $21.9 billion in an IPO last year.
 Bank of China, which also went public last year, ranks sixth, and China
 Construction Bank, which first issued shares in 2005, ranks seventh.
     In addition to becoming larger, banks in emerging markets have become
 more competitive, greatly outperforming Western banks over the past five
 years. The banking industry in China has earned particularly strong returns
 for investors, while Russia's Sberbank boasts a five-year shareholder
 return (adjusted for risk and local market influences) of 12.9 percent per
 year-the highest of any bank.
     "Banks in the BRIC countries will continue to grow much faster than
 their Western peers and a few could emerge as global challengers over the
 next five to ten years," said Tjun Tang, one of the report's coauthors and
 a BCG partner. He predicted that BRIC-country banking revenues will
 increase by an average of 8 percent, on an inflation-adjusted basis, each
 year until 2015. "But developing markets are also more volatile, and if
 confidence goes down, valuations can change very quickly."
     The rapid rise of banks in BRIC countries is just one of the trends
 highlighted in Bigger, Better Banking, BCG's fifth annual study of
 shareholder value creation in the banking industry. Like the previous
 reports, it provides an overview of the state of the industry - reviewing
 the results of the top performers by country, segment, and size - and
 analyzes the drivers of value creation.
     The report covers a large sample of banks that represents more than 80
 percent of the total market capitalization of the global banking industry.
 It also provides a performance ranking of the 100 largest banks. Among the
 report's other key findings:
     -- The total market cap of the banking industry grew 25.5 percent to an
        all-time high of $8.1 trillion last year
     -- The industry's average total shareholder return (TSR) climbed to 25.6
        percent, up from 13.8 percent in 2005
     -- Return on equity increased to 15.9 percent, while the cost of equity
        remained at 9.5 percent, resulting in a record profitability spread of
        6.4 percentage points
     -- Continued equity growth was the largest driver of value creation-in the
        short as well as long term
     -- In developed markets, the banking industries in Canada, Australia, and
        France were at or near the top of the five-year performance ranking for
        the fourth consecutive year
     -- Investment and universal banks were the strongest segments for one-year
        as well as five-year TSR rankings
     With banks facing the challenge of topping record profitability and
 robust growth, the report explores new options for creating value-in
 particular, opportunities to leverage investments in risk management.
     "Few banks have found a way to link the benefits of risk management
 investments-for example, increased transparency and more accurate risk
 assessment-to management decisions," said Gerold Grasshoff, another
 coauthor of the report and a BCG partner. "Risk management should, in fact,
 be seen as a business investment that can unlock new possibilities for
 profitability or growth."
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SOURCE The Boston Consulting Group