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After the Storm

Report

Creating Value in Banking 2010

The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep in-sight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable compet-itive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 68 offices in 39 countries. For more information, please visit www.bcg.com.

After the StormCreating Value in Banking 2010

bcg.com

Ranu Dayal

Lars-Uwe Luther

Peter Neu

Tjun Tang

February 2010

© The Boston Consulting Group, Inc. 2010. All rights reserved.

For information or permission to reprint, please contact BCG at:E-mail: [email protected]: +1 617 850 3901, attention BCG/PermissionsMail: BCG/Permissions The Boston Consulting Group, Inc. One Beacon Street Boston, MA 02108 USA

After the Storm 3

Contents

Preface 4

Executive Summary 6

The State of the Banking Industry 8Performance in Major OECD Countries 14Performance by Market Capitalization 17 Top-Performing Banks 20 Drivers of Performance 23

Rankings of Top Performers 24Large-Cap Banking Companies 25 Mid-Cap Banking Companies 26Ranking by Country 27

Appendix: Sample and Methodology 28

For Further Reading 30

Note to the Reader 31

4 The Boston Consulting Group

Preface

T he recovery of the global banking industry has been as dramatic as its decline. The industry’s market capitalization more than doubled in 2009, and its total shareholder return (TSR), at 47.1 percent, was nearly

the mirror image of the industry’s sharply negative performance in 2008.

There are, however, constant reminders of the tenuous state of the recovery, particularly in OECD countries. In the fourth quarter of 2009, for example, about 20 percent of U.S. construction loans outstanding were more than 30 days past due, up from about 11 percent a year earlier. Late in 2009, the German Bundesbank warned that delayed shock waves from the economic crisis threatened both the global recovery and bank finance. And the International Monetary Fund recently described the overall recovery as “fragile.” In most advanced economies, the IMF expects the recovery to remain sluggish compared with past standards.

Indeed, we could be seeing the development of a two-speed world, characterized by slow growth in mature economies and relatively high growth in many of the so-called rapidly developing economies. The disparity is already evident in the performance of banking sectors. In 2009, 4 of the 30 largest banks worldwide (by market capitalization) were from China, including 3 of the top 5; 2 were from Brazil. The banking TSRs in Latin America as well as Central and Eastern Europe were more than double the global average for 2009.

In many developing markets, robust economies will lead to a steady decline in the number of “unbanked” people, along with the creation of an affluent class of consumers whose banking needs will become more varied and so

phisticated. Local banks will have the presence and knowledge to tap into this opportunity, but banks from OECD countries will continue searching for footholds in new markets—not only to blunt the impact of the next crisis but also to harness the energy of economies more dynamic than their own.

In developed markets, meanwhile, the provenance of the recovery is cause for concern. Most banks have taken steps to clean up their balance sheets, but many have also benefited from extraordinary government intervention. It remains to be seen how banks, not to mention whole economies, will fare in the absence of fiscal and monetary stimulus programs: the support will fade away before the underlying problems do.

In markets that bore the brunt of the crisis, banks have yet to deal with a mountain of bad assets. They also face a concerted push to raise capital requirements, discontinue certain products, and curtail risk-taking activities. The situation has been dubbed a regulatory tsunami. The changes in consumer behavior will be equally profound. In the United States, consumer debt has reached 124 percent of disposable income. Before the inflation of house prices began in 1997, it was only about 90 percent. Other markets, particularly the United Kingdom and Spain, are dealing with similar problems. The deleveraging process has started, but it has a long way to go. The drag on economies could last for years.

Still, the accomplishments of banks in developed markets should not be overlooked. The banking sectors in Australia, Canada, France, and Spain had above-average TSRs in 2009—they ranged from about 51 to about 74 percent. (The global average for all industries was 39 percent.) The average after-tax return on equity for

After the Storm 5

banks in Spain, Canada, and Australia ranged from 12.6 to 14.9 percent, well above the global banking average of 4.1 percent.

The state of the global banking industry is therefore neither universally good nor bad. The recovery—while still ongoing—has been impressive, but it belies the substantial challenges, changes, and uncertainty that remain. In developed markets, especially, optimism and skepticism come in equal doses.

This report provides a historical view of banking performance. For more on the opportunities and challenges that lie ahead, please refer to The Boston Consulting Group’s Collateral Damage White Papers, which take a broad view of the crisis and the downturn. The authors of these papers recently released a book, Accelerating Out of the Great Recession: How to Win in a Slow-Growth Economy. A synopsis of the book can be found at www.accelerating.bcg.com.


The global banking industry staged a re-markable turnaround last year, with strong growth in both market capital-ization and total shareholder return (TSR).

From peak to trough, the market capitalization of the ◊ global banking industry fell by $5.8 trillion as a result of the financial crisis. After bottoming out at $3.1 trillion in the first quarter of 2009, however, the industry’s market value more than doubled over a ten-month stretch, to $6.4 trillion.

In 2009, the average banking TSR climbed to 47.1 ◊ percent—a full 100 percentage points above the 2008 average. It was the highest it had been since 2003, when the banking TSR bounced back following the technology stock crash.

The turnaround was emblematic of the development of a two-speed world, which is characterized by slow growth in mature economies and relatively high growth in many of the so-called rapidly developing economies.

The biggest rebounds, by region, came in Central and ◊ Eastern Europe (CEE) and Latin America. The banking TSRs in these regions improved by more than 150 percentage points.

Western Europe’s banking industry also had a strong ◊ recovery and an above-average TSR. North America’s banking TSR was about 24 percentage points lower than that in Western Europe.

Asia-Pacific’s industry had an above-average TSR, ◊ due to its mix of high-growth emerging markets and resilient developed markets. The recovery in the Middle East, by comparison, was mild.

The TSR of banking industries in the BRIC markets—◊ Brazil, Russia, India, and China—climbed to 85 percent, up from –53 percent in 2008. These countries exemplify the dynamic half of the two-speed world, but the turnaround in banking performance was driven by more than exceptional GDP growth.

The market capitalization of the world’s 30 largest banks grew by 70 percent to $2.8 trillion. Of those 30 banks, 7 are based in Brazil, Russia, or China.

China’s ICBC remained the largest bank in the world, ◊ measured by market capitalization. Its market value soared to $269 billion, up from $174 billion in 2008. Two other Chinese banks were among the ten largest in the world: China Construction Bank and Bank of China.

Four of the ten largest banks were from the United ◊ States: JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup. It was the first time since 2005 that four U.S. banks placed in the top ten, but the rise of some banks was primarily the result of recapitalizations and takeovers. In 2009, European and North American banks issued $263 billion in secondary equity offerings, a record high.

For the first time, each of Australia’s Big Four banks ◊ ranked among the 30 largest banks in the world.

Executive Summary

After the Storm 7

In most countries, the biggest banks accounted for a ◊ growing percentage of the local industry’s market capitalization from 2007 through 2009.

The profitability of banking industries, measured by return on equity (ROE), improved in six of the ten major OECD markets.

For the third consecutive year, Spain, Canada, and ◊ Australia had the most profitable banking sectors among the ten markets. Canada was the only one of those three markets where the average after-tax ROE grew in 2009.

The crisis led to a wide divergence in the profitability ◊ of the ten developed markets. In 2005, their ROEs were all between 10 and 20 percent. The range of profitability scattered in 2007, which shows that although the crisis has been global, its impact has been far from uniform.

Globally, the banking industry’s ROE increased in ◊ 2009 from 3.2 percent to 4.1 percent, but its cost of equity increased even more. As a result, the profitability spread widened to –11.5 percent. Although the industry’s after-tax profit grew by nearly 35 percent, to $131 billion, it remains less than a third of what it was before the crisis.

It remains to be seen whether the banking industry’s ◊ ROE will return to its precrisis level in the near future. Declining margins, coupled with dampened trading revenues and substantially higher risk costs (especially in major OECD countries), make this highly unlikely.

Several proposed regulatory changes, particularly those concerning capital requirements, would have a profound impact on banks around the world.

The most concrete proposals are those recently ad◊ vanced by the Basel Committee on Banking Supervision. The measures are meant to strike a better balance between “financial innovation and sustainable growth,” but they are certain to lead to smaller balance sheets and lower profits.

BCG modeled the potential effects of these proposals ◊ on 32 large banks across 12 countries. The Tier 1 ratios of the 32 banks would decline by about 50 percent due to a stricter definition of eligible Tier 1 capital and increases in risk-weighted assets (RWA) triggered by more stringent calculation rules. To keep their Tier 1 ratios in the range of 6 to 8 percent, the 32 banks would need to increase their core capital by 15 to 40 percent, or $280 billion to $650 billion.

As a result of these proposed regulations, banks will ◊ need to raise more capital in order to maintain their existing business models, or they will have to limit the scope of their activities to stay within the confines of their remaining capital base. The former will dilute the value of existing shares, while the latter will impair both revenues and profits.

Stock prices could fall by about 12 to 25 percent as a ◊ result of the dilution of shares if banks were to raise the amounts of capital described above.


The Stateof the Banking Industry

T he global banking industry has come a long way since the low point of the financial crisis. From peak to trough, its market capitalization declined by about 65 percent, or $5.8 trillion. After falling to $3.1 trillion in

February 2009, however, the industry’s market value more than doubled over a ten-month stretch, to $6.4 trillion. (See Exhibit 1.)

The recovery of market capitalization has been impressive. The industry regained all of the market value lost since September 2008, one of the most tumultuous peri

ods in the history of banking. That month earned its infamy through a string of unsettling events, including the bailout of Fannie Mae and Freddie Mac, the emergency sale of Merrill Lynch, the bankruptcy of Lehman Brothers, the government rescue of AIG, and the collapse of Washington Mutual—the largest bank failure in U.S. history.

After a significant decline in the first quarter of 2009, the industry’s market capitalization increased by about 40 percent in the second quarter and 24 percent in the third quarter. In the fourth quarter, the rally came to an

Total market capitalization, 2004–2009 ($trillions)Quarterly change in total market capitalization,

2008–2009 ($trillions)

Sources: Thomson Reuters Datastream; BCG analysis.Note: Percentage changes in market capitalization were calculated using complete, not rounded, figures for market capitalization. Figures differ from last year's report due to the addition of Middle East banking markets.1 Compound annual growth rate. 2Market capitalization peaked at $8.9 trillion in late 2007 and bottomed out at $3.1 trillion in early 2009.

2004 2009 Q1 2009

Q2 2009

Q32009

Q4 2009

Year end 2008

Year end 2009

2005 2006 2007 2008

2.9% CAGR1

19.3% –12.0% 39.6% 24.1% 1.6% 26.8% 2.7% --52.0% 54.9%

5.6

6.7

8.4 8.7 8.9

–$5.8trillion2

End-of-year values

6.46.4 0.11.2

1.4

–0.54.24.2

Exhibit 1. The Banking Industry’s Market Capitalization Bounced Back in 2009

After the Storm 9

end; the industry’s market value grew by only about 2 percent.

The recovery slowed for three reasons, most of which were more relevant to developed markets. First, the second- and third-quarter surge was partly a reaction to the exaggerated decline in share prices in late 2008 and early 2009 rather than a reflection of fundamental improvements in the industry. Markets had been as unduly harsh to bank stocks as they were to stocks in general. Second, banks in developed economies recapitalized on a massive scale. In 2009, European and North American banks issued $263 billion in secondary equity offerings, a record high. (See Exhibit 2.) Third, concerns about the outlook for banks came into sharper focus as the year progressed. There were mixed signals about the strength of the economic recovery, along with clear signs that regulatory reforms, which were still being developed, were bound to constrain the future growth and profitability of banks.

In December 2009, the Basel Committee on Banking Supervision issued two consultation papers containing a set of proposals for making the global banking system more resilient. The proposals include more stringent risk measurements, a strengthening of banks’ capital base, the imposition of a maximum leverage ratio, and a

global standard for minimum liquidity. Although those proposals will certainly contribute to the stability of the banking system, in the short run, they will impose a high cost on many banks. In OECD markets, the announcement of the proposed changes triggered a decline in bank share prices. (For more on this topic, see the sidebar “Anticipating Regulatory Changes.”)

Regardless, the turnaround in total shareholder return (TSR) was dramatic in 2009, even as a wave of recapitalizations diluted the value of bank shares. The average banking TSR was 47.1 percent—a full 100 percentage points above the 2008 average. (See Exhibit 3.) It was the highest it had been since 2003, when the banking TSR bounced back following the technology stock crash.

The biggest rebounds, by region, came in Central and Eastern Europe (CEE) and Latin America: their banking TSRs improved by more than 150 percentage points.1 CEE owed much of its outstanding performance to Russia and Turkey, which accounted for about 70 percent of the total banking-market capitalization, but all other banking markets in the region generated double-digit

1. Global and regional TSRs were calculated in U.S. dollars and include the effects of fluctuating exchange rates. TSRs for countries and individual institutions were calculated in local currencies.

Equity capital raised by European and North American banks, 1994–2009 ($billions)

Ten banks accounted for about 70 percent of the total recapitalization last year

Sources: Thomson Reuters Datastream; BCG analysis.Note: Only secondary public offerings were included.

11

1994

5

1995

7

1996

17

1997

13

1998

14

1999

19 10

2000

8

2001

19

2002

24

2003

27

2004

43

2005

51

2006 2007

206

2008

184

79

263

2009

Exhibit 2. European and North American Banks Raised $263 Billion in Capital Last Year


The crisis exposed numerous weak points in the global banking system. Perhaps none was more significant than the web of connections that both transferred and magni-fied the problems embedded in particular institutions or investments. Banks were linked to each other—and to cer-tain assets and risks—in ways that became clear only after the crisis deepened. The fact that so many financial institu-tions were caught off-guard is as alarming as the activities that actually precipitated the crisis.

Given the systemic issues that were brought to the fore, it comes as no surprise that politicians, academics, and regu-lators have proposed a range of rules and constraints de-signed to prevent the next crisis. The most sweeping pro-posals are those recently advanced by the Basel Committee on Banking Supervision. The measures are meant to strike a better balance between “financial innovation and sus-tainable growth,” but they are certain to lead to a new nor-mal characterized by smaller balance sheets and lower profits. There are five main proposals:

Introduce more stringent measurements for both mar- ◊ket and credit risk to correct the faulty or misguided methods that proved problematic during the crisis.

Strengthen the capital base by restricting the capital ◊counted as Tier 1.

Impose a maximum leverage ratio to prevent banks from ◊taking on risks that could undermine not only single in-stitutions but entire banking sectors and economies.

Set a global standard for minimum liquid-asset holdings. ◊This should include both short- and long-term liquidity-coverage ratios.

Account for procyclicality and systemic risk by requiring ◊that, during good times, banks build up capital buffers, which could be drawn upon in periods of stress.

We modeled the potential effects of these proposals on 32 large banks across 12 countries. The modeling covered both the impact on risk-weighted assets (RWA)—including incremental defaults, stressed Value at Risk, (re)securitiza-tion, and banking exposure—and the capital base. The analysis underscored the profound ramifications of the pro-posed changes. (See the exhibit.)

The Tier 1 ratios of the 32 banks would decline by about ◊50 percent due to a stricter definition of eligible Tier 1 capital and increases in RWA triggered by more stringent calculation rules. The exclusion of certain items (espe-

cially hybrid instruments) would reduce the Tier 1 ratio by 35 to 40 percent, while increases in RWA would lower the ratio by 10 to 15 percent.

To keep their Tier 1 ratios in the range of 6 to 8 percent, ◊the 32 banks would need to increase their core capital by 15 to 40 percent, or $280 billion to $650 billion (as-suming they preserve their current balance sheets).

The impact of the regulations on both capital and liquid- ◊ity will vary widely by country. In the case of capital regulations, for example, the deduction of mortgage-servicing rights in the United States or net defined pen-sion benefits in the United Kingdom or Switzerland will have profound consequences for banks in these markets. We expect intense lobbying during the consultancy phase.

Banks will need to increase prices and cut costs to blunt the impact of the changes, but the new regulations will still pose a dilemma. Banks will need to raise more capital in order to maintain their existing business models, or they will have to limit the scope of their activities to stay within the confines of the remaining capital base. The former will dilute current shareholdings, while the latter will impair revenues and profits. Under either scenario, investors will see a significant decline in the value of their shares. Stock prices could fall by about 12 to 25 percent as a result of the dilution of shares if banks were to raise the amounts of capital described above (assuming constant price-to-book ratios).

Investors have anticipated these changes. From the day be-fore the regulations were announced through the day after, stock prices of the 32 banks dropped by an average of 2.8 percent. The respective stock markets, by comparison, de-clined by only about 1 percent. The decline among Euro-pean banks—4.4 percent—was much stronger than in North America and Asia-Pacific.

On the whole, however, the decline in bank share prices was actually modest given the potential impact of these changes. This suggests that investors expected the rules to be toned down or delayed, that banks and markets had al-ready anticipated the effects, or that investors had yet to understand the impact of the regulations.

Not every bank will see these changes as a threat. For banks that have stable sources of funding and strong capital posi-tions, the upheaval presents a once-in-a-generation oppor-tunity to increase market share—one bank’s weakness will be another bank’s gain.

Anticipating Regulatory Changes

After the Storm 11

TSRs as well. Likewise, Latin America owed much of its performance to Brazil, which accounted for about 70 percent of the banking market capitalization, but several other banking markets—such as Mexico, Chile, and Argentina—also had outstanding TSRs.

Western Europe’s banking industry also had a strong recovery and an above-average TSR. Asia-Pacific’s industry had the next-highest TSR as a result of its mix of high-growth markets—mainly China and India but also the “tiger states” and other emerging economies—and

Although the proposed regulations will continue to evolve (and might not take full effect before 2012), banks must act now in the following ways to prepare for—and shape—the new regulatory regime.

Understand the potential impact of the proposed chang- ◊es—especially those pertaining to capital, leverage, and liquidity—on the bank’s current business model (includ-ing its clients and products) and its main competitors.

Assign influential senior managers to participate active- ◊ly in the consultative phase of the proposed regulations. The changes are too serious to be delegated to regula-tory risk managers or quants.

Develop strategies for managing the impact of the po- ◊tential changes. Banks will need to restructure capital (for example, by converting hybrid instruments to core capi-tal), increase RWA efficiency (through securitization and the restriction of OTC derivatives), enhance liquidity profiles (for example, by restructuring eligible collat-

eral, enhancing wholesale term funding, and generat-ing stable retail deposits to reduce maturity mis-matches), revamp the business portfolio (by exiting certain businesses or splitting up commercial and investment banking), and reprice in order to cover increased risk costs wherever possible.

Anticipate changes in products and pricing in the capital ◊markets business. For example, we expect higher capital requirements and liquidity constraints to be reflected in either higher margins or shrinking business volumes in the most affected businesses (OTC derivatives, propri-etary trading, and money markets).

Communicate with both investors and analysts to clarify ◊the impact of the regulations, as well as potential mitiga-tion strategies, in order to ensure that capital markets have a fair and accurate assessment of the bank-specific implications.

Change in Tier 1 capital ratios due to proposed regulatory changes1

Proposed Changes Would Dramatically Reduce Tier 1 Capital Ratios

Stock market reaction to the announcement of theproposed changes1

Sources: Thomson Reuters Datastream; BCG analysis based on Bankscope data.1Based on 32 banks: 21 from Europe, 6 from North America, and 5 from Australia and Japan.2To reach a 6 to 8 percent threshold.3Weighted by market capitalization.

4Includes Austria, France, Germany, Italy, the Netherlands, Spain, Switzerland, and the United Kingdom.5Canada and the United States.

Total

Tier 1 ratio (old)

Stock price index of 32 banks3 versus total market (December 14, 2009 = 100)

102

101

100

99

98

0

Tier 1 ratio (new)

Additional Tier 1capital required2

($billions)

4.6%

280–650

Additional Tier 1capital as a per-centage of current Tier 1 capital

15–40%

–5.4 p.p.

10.0%

Europe4

4.8%

140–350

15–40%

–5.1 p.p.

9.9%

NorthAmerica5

4.5%

100–210

15–35%

–6.6 p.p.

11.1%

Australiaand Japan

14-Dec

Sample

Market

15-Dec 16-Dec 17-Dec 18-Dec 21-Dec 22-Dec 23-Dec

4.3%

40–90

25–50%

–3.2 p.p.

–1.8%

7.5%


resilient developed markets, such as Australia. The performance of those markets was enough to offset the negative TSR of Japan’s banking industry. North America had a low banking TSR relative to other developed regions: it was about 24 percentage points lower than the TSR in Western Europe. The recovery in the Middle East, by comparison, was mild. (For more on this region, see the sidebar “Banking in the Middle East.”)

The banking industry had one of the greatest TSR improvements among the ten industries in our study, but the recovery—like the crisis itself—was widespread. TSRs increased by at least 60 percentage points in all but three of the industries. (See Exhibit 4.) Still, banks fared relatively well. From 2008 through 2009, the banking TSR swung from about 10 percentage points below the all-industry average to about 8 percentage points above it. (However, its long-term TSR lagged behind the all-industry average.) Only two industries—basic mate

rials and technology—had higher TSRs over the course of 2009.

Despite those gains, the outlook for the banking industry is mixed. In developed markets, in particular, the recession still weighs heavily on consumers and businesses. And in markets that bore the brunt of the crisis, there are questions about whether the steps banks have taken to strengthen their fundamentals and retool their strategies will be adequate to deal with the challenges associated with toxic assets, more stringent regulations, and risk-conscious and skeptical customers.

The outlook is more optimistic for banks in rapidly developing countries. This is not simply because their stock markets bounced back faster and higher: there are also strong underlying fundamentals. In many of these countries, banks suffered the consequences of the crisis rather than dragging their economies into the crisis. The

50.3-46.1

52.7-62.3

28.9-50.8

105.0-46.0

100.0

-46.8

-67.0

3.6

-53.2

-43.3

Total shareholder return,1 2005–2009 (%) Total shareholder return by region,1 2008 and 2009 (%)

Sources: Thomson Reuters Datastream; BCG analysis.Note: TSRs were calculated after conversion to U.S. dollars.1TSR consists of capital gains and free-cash-flow yields. 2Includes Middle East banking companies since 2006. 3Weighted by market capitalization. 4Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, Pakistan, the Philippines, Singapore, South Korea, Sri Lanka, Taiwan, and Thailand. 5EU-15 countries plus Norway and Switzerland. 6Canada and the United States. 7Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. 8Bulgaria, Cyprus, the Czech Republic, Hungary, Malta, Poland, Romania, Russia, Slovenia, and Turkey. 9Bahrain, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, and UAE (Abu Dhabi and Dubai).

39.0

13.8 13.621.5 23.8

2.3

15.2

47.1 Asia-Pacific4

Western Europe5

North America6

Latin America7

Middle East9

33.5

25.7

24.2

6.9

4.3

4.1

2009

20082009 Percentage of global

banking marketcapitalization, 2009

2005 2006 2007 2008

All-industry average3Banking industry2

–0.5% +5.0%

Central and EasternEurope8

Exhibit 3. Banking TSRs Improved Dramatically in Most Regions

After the Storm 13

Banking in the Middle East

problems, for the most part, did not grow out of the banks’ practices or investing activities. Their business models, as well as their regulatory environments and even their customers, were generally more conservative than those in developed markets.

Banks in developing markets are likely to deliver high levels of growth and profitability as their local economies resume their growth trajectories and more con

sumers become active in banking. In these markets, the prospect of increasing the penetration of even the most basic products and services represents a significant growth opportunity (much more so than in developed countries). Domestic competitors, with their local knowledge and networks, will be better placed than foreign banks to tap into this demand, but banks from OECD countries will continue to search for opportunities in the faster-growing parts of the two-speed world.

The total shareholder return (TSR) of Middle Eastern banks, at 3.6 percent, was a fraction of the global aver-age. But this subdued recovery, while indicative of the challenges facing both the region and specific institu-tions, belies its potential for sustained growth and high profitability.

The Performance Perspective. It took time for the fi-nancial crisis to affect Middle Eastern banks, most of which had little or no direct exposure to toxic assets. When it did materialize in August 2008, it was primarily a liquidity crisis rather than a credit crisis.

The impact of the crisis was not only delayed but also less severe. The region’s banking TSRs did not fall as steeply as they did elsewhere. Nor did they bounce back as much, particularly in comparison with markets that had overcorrected bank stocks.

Although Middle Eastern banks have not staged a dra-matic recovery, most have proved to be resilient during the crisis. The industry’s revenues have continued to grow, helping to keep cost-to-income ratios low, and its profits have not declined as much as they have in other regions.

In general, banks have been relatively profitable. The average after-tax ROE of 12 major banks in the region, representing 50 percent of the market capitalization, was 17.5 percent in 2009. The global average was only 4.1 percent. Middle Eastern banks also have relatively high capital ratios, and this bodes well for their ability to both weather the next crisis and comply with proposed regulatory changes.

The outlook for the region’s economic growth remains optimistic, despite the uncertainty created by Dubai’s real-estate crisis. GDP is expected to grow at above-av-erage rates, which should lead to strong growth for banks. Some banks, especially those with solid posi-tions in their home markets, are developing a broader presence in the region.

The Regional Perspective. The market capitalization of nine major banking markets in the Middle East in-creased to about $275 billion in 2009, up from $269 bil-lion in 2008. Saudi Arabia and Kuwait accounted for more than half of this total. Rounding out the region’s five largest banking sectors were Qatar ($33.6 billion), Abu Dhabi ($28.2 billion), and Dubai ($19.8 billion).

Performance varied widely in the region. In 2009, four of the nine banking markets posted TSRs of at least 20 percent: Lebanon, Oman, Abu Dhabi, and Saudi Arabia. Another four had TSRs below –14 percent: Jordan, Dubai, Bahrain, and Kuwait. Qatar posted a TSR of 7.5 percent. In some cases, the weak performance of a banking industry stemmed from a sharp decline in the share price of a single bank or from macroeconomic or political factors in the local market.

Banking profits also varied widely. The banking indus-tries in Saudi Arabia and Abu Dhabi experienced only a small decline in profits in 2009. The decline in Kuwait and Bahrain, on the other hand, was sharp. In some markets, falling profits were the result of a significant rise in loan loss provisions, which are expected to stay high in 2010.


Performance in Major OECD Countries

Each of the ten major banking markets increased its TSR in 2009, but the variation was extraordinary. In some markets, the improvement reflected broad trends in banking or the economy. In others, the performance of one or two major banks accounted for the lion’s share of the increase in TSR.

France.◊ Among the ten markets, France’s banking industry staged the most dramatic turnaround. Its TSR went from ninth place in 2008 to first in 2009, at 74.4 percent. (See Exhibit 5.) This swing was driven largely by the performance of BNP Paribas, which had a TSR of about 94 percent. The bank’s recovery in 2009 was a backlash against the strong correction of its share price in 2008, but it also reflected the progress made on the Fortis integration.

French banks, in general, held up well in the face of the financial crisis. Their business models, which focus on traditional retail and corporate clients, proved to be resilient.

Australia.◊ Australia’s banking industry achieved an above-average TSR of 61.5 percent in 2009, capping off a run of impressive performance. Among the ten major OECD banking markets, Australia had the highest average annual TSR from 2005 through 2009. The 2009 TSR reflected the shallower-than-expected Australian downturn, which contributed to better-than-expected credit demand (and higher lending margins) and less severe credit losses (which leveled off at around half of provisions). Banks also benefited from the deposit and wholesale funding guarantees introduced in late 2008.

Canada.◊ As in many developed markets, the share prices of most Canadian banks bottomed out in the first quarter of 2009 and then grew aggressively. Share prices initially moved in line with global fears and expectations. Once the rebound started, however, the specific advantages of Canada’s financial-services industry helped boost TSRs. Banks operate in a relatively strict regulatory environment, which includes higher Tier 1 capital requirements (since 1999), more stringent regulations on what can be included

+142.1

+42.0

+85.5

+50.4

+74.1

+86.2

+48.4

+108.1

+64.7

+100.3

Change, in percentage points, from 2008 TSR

Basic materials

Oil and gas

Utilities

Consumer goods

Industrials

Telecommunications

Health care

Technology

Consumer services

Banking

All–industry average2

14.7

12.3

9.8

7.4

5.2

5.2

4.5

4.2

1.4

86.9

40.9

15.7

37.4

39.9

13.6

21.6

63.0

30.1

47.1

5.0 39.0

–0.5

Total shareholder return,1 2005–2009 p.a. (%) Total shareholder return,1 2009 (%)

+82.3

Sources: Thomson Reuters Datastream; BCG analysis.Note: All TSRs were calculated after conversion to U.S. dollars based on the respective Thomson Reuters Datastream global industry index (market-cap weighted). The TSR for the banking industry was based on Thomson Reuters Datastream global banking and financial services indices.1TSR consists of capital gains and free-cash-flow yields. 2Weighted by market capitalization.

Exhibit 4. The Banking Industry’s TSR Had One of the Biggest Turnarounds

After the Storm 15

as Tier 1 capital, and tighter limits on debt-to-equity ratios. Besides these systemic factors, the industry benefited from bank-specific initiatives to reduce costs; a very healthy mortgage market; widening spreads in small businesses, commercial and institutional banking, and capital markets businesses; and moderate (rather than excessive) levels of loan losses. Among the ten major banking markets, Canada had the third-highest average after-tax ROE in 2009, at 12.6 percent. The four largest banks had TSRs of at least 55 percent and managed to outperform the Canadian stock market. The Canadian banking industry also had the second-highest five-year TSR among the ten markets.

Spain.◊ Spain’s industry is dealing with a flood of troubled mortgages, but these problems have been largely confined to smaller banks, the cajas de ahorros (savings banks), and mortgage finance companies. The two major banks, Banco Santander, with a TSR of 83 percent, and BBVA, with a TSR of 55 percent, are well diversified by both line of business—they are true universal banks—and geographic scope: each has a presence in Latin America. This diversification al

lowed them to weather the crisis better than other banks. It also contributed to the industry’s robust long-term performance. Among the ten major markets, Spain had the third-highest average annual TSR from 2005 through 2009.

Germany.◊ Germany’s banking market is dominated by unlisted savings and cooperative banks, which fared relatively well in the crisis: customers saw them as safe havens. The Landesbanken, a group of state-owned banks, were more deeply affected by the crisis, and many had to be restructured. Among listed banks, Deutsche Bank had a standout TSR of 79 percent in 2009. Its investment-banking operations profited from the extraordinary activity in bond markets. The bank also holds a stake in retail-oriented Postbank, which achieved a TSR of 45 percent. Postbank took steps to tighten its cost base and refocus its business model on its core retail clientele, mainly by offering standard products at attractive prices.

Italy. ◊ The Italian banking industry’s low volatility and modest five-year TSR—which was negative but still better than those in comparable markets—owed

Total shareholder return,1 2005–2009 p.a. (%) Total shareholder return,1 2009 (%)

Sources: Thomson Reuters Datastream; BCG analysis.Note: All TSRs were calculated in local currencies.1TSR consists of capital gains and free-cash-flow yields.

Change, in percentage points, from 2008 TSR

9.2

8.9

61.5

60.8

51.6

34.8

74.4

33.4

37.5

29.9

23.5

–18.0

–0.5

5.6

–1.4

–2.8

–3.8

–6.3

–7.1

–14.5

Germany

United Kingdom

United States

Japan

Australia

Canada

Spain

Italy

France

Switzerland

+103.9

+92.7

+97.0

+88.9

+135.9

+89.2

+99.4

+80.5

+67.3

+25.4

Exhibit 5. The Recovery Took Hold in All Major Banking Markets Except Japan


much to its focus on traditional retail and corporate activities. UniCredit and Intesa Sanpaolo are the two dominant banks. UniCredit, which posted a TSR of 51 percent, regained much of the market value it lost in 2008, while Intesa Sanpaolo, with a TSR of 24 percent, was more resilient from the outset of the crisis. The structural integrity of Italy’s banking industry meant that government support in the wake of the crisis was relatively limited. Since the onset of the crisis, government loans to banks have totaled less than €5 billion; major banks have not accepted any of this assistance.

Switzerland.◊ The Swiss banking industry—which is dominated by the two major banks, UBS and Credit Suisse Group—experienced ups and downs in 2009. Many banks, particularly Credit Suisse but also several private banks, staged decent recoveries. Credit Suisse had a TSR of 80 percent in 2009. UBS, on the other hand, continued to suffer from its exposure to the financial crisis. It had a TSR of 8 percent in 2009. Its investment bank again posted a loss for the year, and its wealth-management arm continued to experience significant asset outflows.

The United Kingdom. ◊ A contracting economy and rising unemployment have been burdens to the U.K. banking sector in general, but performance varied widely. There was a clear divide between banks that received substantial capital injections from the government and those that did not. In the former group, for example, The Royal Bank of Scotland and Lloyds Banking Group both had negative TSRs in 2009. In the latter group, HSBC, the third-largest bank in the world (measured by market capitalization), had a TSR of about 28 percent, while Barclays Bank had a TSR of about 81 percent. Standard Chartered Bank’s TSR, at about 89 percent, was nearly double the global industry average. Its performance was driven largely by its global presence and strong foothold in emerging markets.

The United States. ◊ In 2009, the U.S. banking industry had the second-lowest TSR of the ten major OECD markets, at 23.5 percent. Although the worst of the crisis seems to have passed (many large institutions have repaid their Troubled Assets Relief Program [TARP] funds), the U.S. banking industry will continue to face headwinds, including slow GDP

growth, high unemployment, and an evolving—and almost certainly more stringent—regulatory environment.

There was significant variation in the performance of individual banks. While some U.S. banks recovered quickly—Goldman Sachs had an outstanding TSR of 102 percent in 2009—many had yet to resolve the problems associated with the crisis and still had negative TSRs, despite the bullish market. Some of the lackluster TSRs were the result of large recapitalizations, which diluted the price of shares. U.S. banks accounted for about 40 percent of the total recapitalization activity that took place in Europe and North America in 2009.

U.S. banks, in general, benefited from an unprecedented level of government intervention and assistance. Their performance—as well as the growth of the economy as a whole—was buoyed by these meas-ures. As these initiatives wind down, observers are concerned that many of the problems associated with the crisis, such as weak home prices and rampant foreclosures, will reexert massive pressure on consumers, businesses, and banks.

Write-downs in loan portfolios could continue to be a serious problem. According to Oppenheimer Research, the net charge-offs of five major retail banks have almost quadrupled since the start of the crisis. The losses could be even greater for midsize and small banks, particularly those that are heavily involved in commercial real estate.

Japan.◊ Japan’s banking industry had the only negative TSR among the ten developed markets, –18.0 percent. Its ten largest banks each had a negative TSR in 2009, but their performance was not a direct result of the crisis: Japanese banks were not heavily invested in assets backed by subprime mortgages, and no major banks had to rely on government-funded capital injections. Rather, banking performance was affected by two other factors. First, the growth forecast for Japan’s economy is the lowest among developed economies. The problem stems from the country’s aging and shrinking population. Second, the markets have serious concerns that a large part of the Tier 1 capital held by major banks may not satisfy the proposed regulatory standards.

After the Storm 17

Performance by Market Capitalization

In 2009, the market capitalization of the world’s 30 largest banks grew by 70 percent to $2.8 trillion. This is a stark contrast to 2008, when it fell by half and each of the 30 largest banks lost market capitalization.

As diverse as those 30 banks are, many of them drew on similar strengths or advantages in order to recover their market capitalization.

In markets around the world, large retail-oriented ◊ universal banks thrived. In some cases, this was due to consolidation, but many of these banks benefited from their broad base of businesses, customers, and branch networks.

In developed markets such as Australia and Canada, ◊ bank performance was bolstered by a combination of resilient economies and relatively strict regulatory environments.

In developing markets, resurgent economies helped ◊ fuel the growth of banks. Of the 30 largest banks in the world, 7 are based in Brazil, Russia, and China.

ICBC remained the largest bank in the world, measured by market capitalization. (See Exhibit 6.) Its market value soared to $269 billion, up from $174 billion in 2008. Two other Chinese banks were among the ten largest in the world: China Construction Bank and Bank of China. A fourth Chinese bank, Bank of Communications, ranked eighteenth. (For more on China, see the sidebar “Returning to Form: Banking in BRIC Markets.”)

Four of the ten largest banks were from the United States: JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup, which reentered the top ten after having dropped out in 2008. It was the first time since 2005 that four U.S. banks placed in the top ten, but the rise of some banks was primarily the result of recapitalizations and large-scale consolidation, which led to the absorption of significant entities such as Washington Mutual,

Sources: Thomson Reuters Datastream; BCG analysis.Note: All market capitalizations are based on figures in U.S. dollars.1 Numbers in parentheses indicate change in rank since December 31, 2008.2Acquisition of Wachovia was completed on January 2, 2009. 3Acquisition of Merrill Lynch was completed on January 2, 2009. 4Banco Itaú and Unibanco announced their merger on November 3, 2008; it took effect on March 31, 2009. 5Takeover of HBOS was completed on January 19, 2009. 6Represents a new entry.

Market capitalization ($billions)

Top 10

Rank by market capitalization1

300

200

50

150

100

05 10 15 20 25 30

Société Générale (±0)National Australia Bank6 (+2)

Standard CharteredBank6 (+6)

Banco Bradesco (+8)

Commonwealth Bank of Australia (+13)

Royal Bank of Canada (+1)

Credit Suisse Group (+5)

Goldman Sachs (+7)

Bank of Communications (–1)Sberbank6 (+33)

Westpac Banking (+1)BBVA (–6)

Intesa Sanpaolo (–13)Lloyds Banking Group5,6 (+31)

Australia and New Zealand Banking Group6 (+11)

Banco Santander (±0)

JPMorgan Chase (–1)

Bank of America3 (±0)

Bank of China (±0)

China Construction Bank (±0)

Market capitalization of the top 30 banks in 2008Market capitalization of the top 30 banks in 2009

ICBC (±0)

UBS (-10)The Toronto-Dominion Bank (+2)

BNP Paribas (+6)

Wells Fargo2 (±0)

Mitsubishi UFJ Financial Group (–6)

UniCredit (±0)

Citigroup (+6)Itaú Unibanco4 (+13)

HSBC (+1)

Exhibit 6. The Largest Banks Achieved Substantial Gains in Market Capitalization


The term BRIC, which was coined more than eight years ago, has endured largely because the BRIC economies are still regarded as dynamic and increasingly important. In fact, the World Bank recently estimated that these coun-tries will be among the world’s five largest economies by 2050. Given the link between GDP growth and the growth of banking, their banking markets are certain to become even more prominent on the world stage.

The banking industries in the BRIC markets staged a re-markable recovery in 2009. Their combined total share-holder return (TSR) climbed to 85 percent, up from –53 percent in 2008. These countries exemplify the dynamic half of the two-speed world, but the turnaround in banking performance was driven by more than exceptional GDP growth.

For starters, the impact of the crisis on BRIC banks had less to do with underlying problems in their financial sec-tors, such as direct exposure to U.S. subprime mortgages, and more to do with adjustments to extremely high market values. In addition, banks in the BRIC countries benefited from the conservative leanings of both their business mod-els and their local environments. Finally, some of the most prominent banks in these markets have spent years devel-oping competitive capabilities and practices. Several BRIC companies were among the top-performing banks, meas-ured by relative total shareholder return (RTSR), which means that they outperformed both their peers and their local markets.

Brazil. ◊ In 2009, Brazil’s banking industry had a TSR of 65 percent. Its performance was driven as much by busi-ness fundamentals as it was by the relatively buoyant economy. Banks, in general, have healthy balance sheets, with capital ratios of at least 15 percent, and loans have grown at a steady rate. Improved expectations for both the economy and the banking industry have led to high-er price-to-book multiples. Crowning a successful year for the banking industry, Banco Santander’s local opera-tion raised $7 billion in October—it was the largest IPO in the world in 2009—and Brazil’s largest nonstate banks, Itaú Unibanco and Banco Bradesco, moved up in the ranking of the largest banks worldwide, measured by market capitalization. Having achieved strong growth and profitability locally, leading banks are starting to fo-cus on opportunities to expand within and even beyond the region.

Russia. ◊ Russia’s banking industry had a TSR of 185 per-cent in 2009. The landscape is dominated by Sberbank, which accounted for two-thirds of the industry’s market

capitalization in 2009. The bank has an outsize presence. It is the dominant deposit taker in Russia, as well as one of the few banks in the market that would not need to slash its risk-weighted assets for funding reasons. And with its extensive distribution network—it accounts for nearly one in three banking outlets—Sberbank has ben-efited significantly from government initiatives to bolster the mortgage and car loan sectors. Even as demand was falling, the bank managed to gain market share. The bank has also benefited from its own improvement initia-tives. A restructuring program, which began a year and a half ago, has started to show tangible results.

India. ◊ The TSR of India’s banking industry climbed to 84 percent in 2009, a turnaround of more than 120 percent-age points from 2008. Indian banks have grown in tan-dem with the economy. State Bank of India, which had an average annual RTSR of about 9 percent from 2005 through 2009, entered the ranks of the 50 largest banks in the world in 2009, benefiting from a significant inflow of deposits during the crisis. Two other institutions, HDFC and HDFC Bank, delivered five-year TSRs that were more than 5 percentage points higher than the performance of the Indian stock market. While ICICI Bank recovered some of the ground it lost to other Indian banks in 2009, it ended up with a five-year TSR that was essentially in line with the broader Indian stock market.

China. ◊ In 2009, China’s banking industry had a TSR of 68 percent and accounted for three of the world’s five largest banks, measured by market capitalization. Across the banking industry, lending surged in 2009. New loans reached RMB 9.6 trillion ($1.4 trillion), an increase of 34 percent for the year. This credit expansion was sparked by the government’s loose monetary policy and massive stimulus plan, both of which helped the economy grow by 8.7 percent and allowed banks to continue growing profits. But the expansion of credit, coupled with expec-tations of a more cautious regulatory approach, has led to concerns that banks will need to raise capital in the coming months. In fact, 2010 is likely to present several challenges, as authorities rein in bank lending—partic-ularly in sectors at risk of overheating, such as proper-ty—and as loan loss provisions begin to rise.

Despite these challenges, leading Chinese banks are ex-pected to maintain their profitability by relying on bal-ance sheet lending to large domestic clients, reinforcing risk controls, and enhancing their retail and wealth of-ferings. Some will also gravitate toward universal bank-ing (within the limits of regulations) by investing in trust companies, asset managers, and insurance companies.

Returning to Form: Banking in BRIC Markets

After the Storm 19

Wachovia, Merrill Lynch, and Bear Stearns. Rounding out the top ten were banks from the United Kingdom (HSBC), Spain (Banco Santander), and France (BNP Paribas).

The order of the ten largest banks remained relatively stable from 2008 through 2009, following several years of ups and downs. (See Exhibit 7.) The hierarchy has not solidified—the industry remains far too volatile—but the three Chinese giants, along with HSBC, have kept their positions fairly steady since 2007.

For the first time, each of Australia’s Big Four banks ranked among the 30 largest banks in the world. Commonwealth Bank of Australia (CBA) had the highest market capitalization, followed by Westpac Banking, Australia and New Zealand Banking Group (ANZ), and National Australia Bank.

The biggest leaps in the ranking were made by Russia’s Sberbank and Lloyds Banking Group (aided by the takeover of HBOS), which advanced 33 and 31 places, respectively. The next-biggest gains were made by CBA and Itaú Unibanco: they both moved up 13 places. Itaú Unibanco became the eleventh-largest bank in the world through the 2009 merger of Banco Itaú and Unibanco.

The merger was successful, and the new bank has been highly profitable.

Market Concentration. In most countries, the biggest banks accounted for a growing percentage of the local industry’s market capitalization from 2007 through 2009. It is not surprising that the steepest increases were the result of mergers and acquisitions (M&A). The market capitalization of Brazil’s three largest banks, as a percentage of the local industry’s market value, rose 14 percentage points to 72 percent. There were also significant rises in the United Kingdom (up 13 percentage points to 71 percent), Australia (up 9 percentage points to 63 percent), and the United States (up 6 percentage points to 33 percent). Some M&A deals were precipitated by the crisis, while others were primarily meant to reap greater economies of scale.

Globally, the banking titans have become even larger in relative terms. According to the Bank for International Settlements, the world’s five largest banks (by assets) held about 10 percent of the total banking assets in 2000; in 2009, they held more than 15 percent.

There has been considerable debate about the systemic issues posed by banks that have grown “too big to save.”

The ten largest banks, by market capitalization, 2005–2009

Sources: Thomson Reuters Datastream; BCG analysis.Note: ICBC and Bank of China have been publicly listed only since 2006.

4

ICBC

8

China Construction BankHSBCJPMorgan ChaseBank of ChinaWells FargoBanco SantanderBank of AmericaBNP ParibasCitigroup10

12

14

16

2

0

6

20092005 2006 2007 2008

Ranking

Exhibit 7. The Ranking of the Ten Largest Banks Stabilized Last Year


These concerns are valid, given the extraordinary meas-ures governments were essentially forced to take during the crisis, but greater concentration does not necessarily imperil a banking industry. Indeed, a more concentrated industry could create potential benefits on the regulatory side as well.

By focusing its effort on a smaller set of banks, a regulator can become more knowledgeable, and the regulatory system could become more effective and less complex. Moreover, consolidation in overbanked markets will likely lead to better performance for the remaining banks, thereby benefiting the industry (and its customers). In the end, the regulator can actually become more proficient—and the industry safer—as a result of concentration. Certainly, the Canadian and Australian markets provide good illustrations that concentrated markets do not necessarily impair regulation.

Top-Performing Banks

Our analysis of banking performance looked at the after-tax ROEs of developed markets, as well as the rela

tive total shareholder return (RTSR) of large- and mid-cap banks around the world. (RTSR adjusts TSR for local market influences.)

Country Banking Sectors. The profitability of banking industries, measured by ROE, improved in six of the ten major OECD markets. For the third consecutive year, Spain, Canada, and Australia had the most profitable banking sectors among the ten markets. (See Exhibit 8.) Canada was the only one of those three markets where the average after-tax ROE grew in 2009: it increased from 11.0 to 12.6 percent. After-tax ROEs in Spain and Australia declined by 1.3 and 2.4 percentage points, respectively.

Among the ten major OECD markets, Switzerland’s banking market had the most dramatic turnaround in profitability. Its average after-tax ROE increased from –35.9 percent in 2008—the lowest among the ten markets—to 7.6 percent in 2009. This swing was attributable to the country’s largest banks, UBS and Credit Suisse Group. Although UBS continued to deal with problems stemming from its exposure to the crisis—it posted a

After-tax ROE, 2005–20091 (%) Most profitable banking sectors and universal banks,

2009 after-tax ROE1 (%)

Sources: Thomson Reuters Datastream; BCG analysis.Note: When data were unavailable for 2009, calculations were based on Bloomberg consensus forecasts.1ROE was calculated based on average equity. Includes only banks with market capitalizations above $5 billion in the ten major developed markets. 2Average of all banks.

Spain

Australia

Canada

Switzerland

France

Italy

Germany

United States

United Kingdom

Japan20092005 2006 2007 2008

Most profitable universal bankCountry average2

The Chiba Bank

BNP Paribas

Standard Chartered Bank

Deutsche Bank

Intesa Sanpaolo

Northern Trust

Credit Suisse Group

Commonwealth Bankof Australia

The Bank of Nova Scotia

BBVA

12.7 19.0

12.6 18.2

7.6 21.2

4.0 9.3

14.9

5.7

3.5 13.5

3.3 13.4

–0.5

18.3

14.3

2.2–11.3

3.8

Australia

30

20

10

0

United StatesUnited KingdomJapan

ItalyFrance

Spain

CanadaSwitzerland

Germany

–40

–10

Exhibit 8. Spain, Australia, and Canada Had the Most Profitable Banking Sectors Among Ten Major Markets

After the Storm 21

loss of CHF 2.7 billion ($2.6 billion) in 2009—it still managed to improve its profitability. Credit Suisse became highly profitable in 2009.

Germany’s banking market also had a sharp rebound in profitability. Its average after-tax ROE climbed from –8.1 percent in 2008 to 3.5 percent in 2009. This was driven mainly by Deutsche Bank’s increased profitability. The banking industry in Japan experienced the sharpest decline in profitability, with the average after-tax ROE falling by 21.6 percentage points from 2008 through 2009, to –11.3 percent.

The crisis led to a divergence in the profitability of the ten major developed markets. In 2005, their ROEs were all between 10 and 20 percent. In 2007, however, their ROEs began to spread out, and the range grew much wider the next year. The divergence shows that although the crisis has been global, its impact on banks has been far from uniform.

Large-Cap Banks. In 2009, the group of top-performing large-cap banks—measured by RTSR—was dominated

by European and U.S. institutions. (See Exhibit 9.) The only banks from outside these markets were Sberbank and CBA. Many of the top performers were universal banks, but there were also two investment banks—Goldman Sachs and Morgan Stanley—along with a credit card specialist, American Express.

For many banks, the recovery was primarily a reaction to the sharp decline in share prices in 2008, but several fared well over a five-year period as well. Two types of banks seemed more likely to sustain above-average performance over a long period. On the one hand, there were banks (for example, Sberbank and Standard Chartered Bank) that are from, or have a foothold in, emerging markets. On the other hand, there were institutions (for example, BlackRock and Charles Schwab) that have stable, low-risk business models focused on activities such as asset management or transaction banking.

The top performers in 2009 generally had lower alphas compared with previous years, which might be due to higher risk premiums for bank stocks. (Alpha signifies the deviation of an individual stock’s performance from

RTSR,1 2005–2009 (%)

Top ten large-cap performers

RTSR,1 2009 (%)

Sources: Thomson Reuters Datastream; BCG analysis.Note: The sample consists of the 50 largest banks by market capitalization as of December 31, 2009, that had a five-year market history. Banking companies from the Middle East were excluded from this analysis due to the lack of market indices. All TSRs were calculated in local currencies.1For further explanation of this measure, see the appendix. 2Alpha is the risk-adjusted excess return on an investment above what would be predicted by the market. For further explanation, see the appendix.

Alpha (%)2

24.2

17.5

10.3

10.5

10.5

7.5

10.1

7.7

8.4

9.2

26.3

22.2

37.1

20.2

28.7

24.4

27.9

15.2

33.9

27.0

BlackRock

Sberbank

China Merchants Bank

Charles Schwab

Goldman Sachs


State Bank of India

Royal Bank of Canada

American Express

Sberbank

Goldman Sachs

BNP Paribas

Deutsche Bank

Banco Santander

Credit Suisse Group

Morgan Stanley


25.2

23.7

15.1

10.4

9.9

9.5

9.4

8.7

8.2

7.9

76.6

74.0

58.2

51.5

50.9

48.1

47.2

46.8

44.8

42.7


Franklin TempletonInvestments


Exhibit 9. In 2009, Most Top-Performing Large-Caps Were from Europe or the United States


risk-adjusted market expectations.) All five-year top performers, however, had high positive alphas, indicating that they exceeded the market’s risk-adjusted expectations. This provides some evidence that banks with certain business models are indeed able to deliver positive abnormal returns in the long run. (See the appendix for a description of RTSR and alpha.)

Mid-Cap Banks. For the second year in a row, there was a complete turnover in the ranking of the top mid-cap banks. (See Exhibit 10.) Some of the banks in the 2009 ranking made giant leaps in one-year RTSR performance. The RTSR of Natixis, for instance, rose from –74.7 percent in 2008 to 121.2 percent in 2009. Several other top performers also recovered from weak performance. The top performers of 2009, on average, had had an RSTR of around –35 percent in 2008.

Four of the top performers in 2009 had negative alphas. The combination of a high RTSR and a low or negative alpha indicates that, although the stock outperformed the local market, the return was not high enough to compensate for the risk taken by the investors.

Unlike previous years, many of the mid-cap top performers had lower RTSRs than the large-cap top performers. Most of the top-performing large-cap banks were from developed markets, while many of the best mid-caps were from developing markets. Since developed economies (and their stock markets) had a slower recovery than many emerging econo mies, it was easier for large-cap banks to outperform their local markets.

Seven of the ten top mid-cap performers from 2005 through 2009 were from emerging markets, but their backgrounds and business models varied widely. The variety is exemplified by the four ASEAN representatives among the top ten performers from 2005 through 2009. Bank Rakyat Indonesia (BRI) and Bank Central Asia (BCA), although they are based in high-growth Indonesia, have very different strategies. BCA focuses on urban retail markets, while BRI has built the world’s most significant microfinance franchise. Siam Commercial Bank overcame the limitations of slow growth and political uncertainty in Thailand to establish itself as the clear market leader across all retail businesses. It

RTSR,1 2005–2009 (%)

Top ten mid-cap performers RTSR,1 2009 (%)

Sources: Thomson Reuters Datastream; BCG analysis.Note: The sample consists of the banks ranked 51 to 100 by market capitalization as of December 31, 2009, that had a five-year market history. Banking companies from the Middle East were excluded from this analysis due to the lack of market indices. All TSRs were calculated in local currencies.1For further explanation of this measure, see the appendix. 2Alpha is the risk-adjusted excess return on an investment above what would be predicted by the market. For further explanation, see the appendix. 3Housing Development Finance Corporation.

Alpha (%)2

10.2

10.7

13.2

11.1

8.2

9.5

12.4

7.5

0.0

–1.3

38.8

28.8

38.2

16.1

39.8

–14.2

–2.5

–6.8

–14.3

9.4

16.1

13.9

12.0

11.0

8.1

7.4

7.4

5.2

3.8

2.5

121.2

65.0

59.4

53.8

50.4

42.0

29.9

29.8

27.5

24.6

Türkiye Garanti Bankasi

CIMB Group Holdings

T. Rowe Price

TD Ameritrade

Siam Commercial Bank

HDFC3

Bank Central Asia

HDFC Bank

Bank Rakyat Indonesia

Akbank

Natixis

Danske Bank

DnB NOR

CIMB Group Holdings

National Bank of Canada

Woori Finance Holdings

Türkiye Garanti Bankasi

Macquarie Group

Swedbank

National Bank of Greece

Exhibit 10. Most Mid-Cap Top Performers Were from Emerging Markets

After the Storm 23

doubled its branch footprint over five years, largely through organic growth. CIMB Group, on the other hand, has successfully acquired and integrated a number of institutions—first in Malaysia and then in Singapore, Indonesia, and Thailand.

Drivers of Performance

The banking industry’s profitability, measured by ROE, increased to 4.1 percent in 2009, but its cost of equity (COE) increased even more. (See Exhibit 11.) As a result, the profitability spread widened to –11.5 percent.

It remains to be seen whether bank ROEs will return to their precrisis levels in the near future. Declining margins, coupled with dampened trading revenues and substantially higher risk costs (particularly in major OECD countries), make this highly unlikely.

The rise in COE was the result of two factors. First, the risk-free rate increased in most markets. In the United States, for example, the risk-free rate now stands at 3.6 percent compared with 2.2 percent at the end of 2008. There were similar but less pronounced increases in other markets. Second, the average beta of bank stocks—a measure of their perceived risk relative to the overall market—increased in 2009 from 1.28 to 1.50. Although the financial crisis seemed to be receding, investors were evidently concerned about the risks embedded in many banks.

After slipping in 2008, the industry’s equity grew by about 15 percent in 2009. Much of this growth was driven by the recapitalization efforts of large European and U.S. banks rather than by retained profits. The industry’s after-tax profit grew by nearly 35 percent, reaching $131 billion, but it remains less than a third of what it was before the crisis.

Sources: Thomson Reuters Datastream; Bloomberg; BCG analysis.Note: When data were unavailable for 2009, calculations were based on Bloomberg consensus forecasts. To meet the data requirements of this performance analysis, a subset of the full market sample was used—352 banks instead of 549.1ROE = after-tax return on average equity; COE = cost of equity. 2Percentage changes are based on complete, not rounded, figures.

20082005 2006 2007 2009 20082005 2006 2007 2009

20082005 2006 2007 2009

Profitability1 (%) Equity2 ($trillions)

After-tax profit2 ($billions)

15.6

4.1

15.5

10.5

10.8

17.9

14.2

12.4

14.1

3.2ROE

COE

2.02.5

3.1 3.03.4

13197

399410308

15.4%–4.2%21.5%24.2%

34.8%–75.7%–2.8%33.4%

Exhibit 11. After-Tax Profits Improved in 2009


Rankings of Top Performers

Rankings were performed by assessing all the banks for which a five-year RTSR could be

calculated. Therefore, banks with public offerings after January 1, 2005, were excluded from

this analysis; examples include ICBC and China Construction Bank. Banks were then ranked

by market capitalization and segmented into two groups: the largest 50 banking companies

were designated large-caps, and the companies ranked 51 to 100 were designated mid-caps.

After the Storm 25

BlackRockSberbankChina Merchants BankCharles SchwabGoldman SachsStandard Chartered BankFranklin Templeton InvestmentsState Bank of IndiaCommonwealth Bank of AustraliaRoyal Bank of Canada

Banco BradescoBanco SantanderJPMorgan ChaseIntesa SanpaoloWestpac BankingNordeaThe Toronto-Dominion BankItaú UnibancoThe PNC Financial Services GroupBNP Paribas

The Bank of Nova ScotiaAustralia and New Zealand Banking GroupWells FargoCredit Suisse GroupBBVAHSBCBank of China (Hong Kong)The Bank of New York MellonBank of MontrealAmerican Express

National Australia BankU.S. BancorpCanadian Imperial Bank of CommerceHang Seng BankDBS Group HoldingsUniCreditSociété GénéraleDeutsche BankMorgan StanleyCrédit Agricole

Nomura HoldingsMitsubishi UFJ Financial GroupSumitomo Mitsui Financial GroupBarclays BankMizuho Financial GroupBank of AmericaUBSLloyds Banking GroupCitigroupThe Royal Bank of Scotland

USARUSCHNUSAUSAGBRUSAINDAUSCAN

BRAESPUSAITAAUSSWECANBRAUSAFRA

CANAUSUSACHEESPGBRHKGUSACANUSA

AUSUSACANHKGSGPITAFRAGERUSAFRA

JPNJPNJPNGBRJPNUSACHEGBRUSAGBR

AMUBUBIBIBUBAMUBUBUB

UBUBUBUBUBUBUBUBUBUB

UBUBUBUBUBUBUBAMUBCF

UBUBUBUBUBUBUBUBIBUB

IBUBUBUBUBUBUBUBUBUB

122

27363

1014349

18

326

293325221931394

2123447

17351541111

3045284226202458

16

38434613474037485049

43.859.650.521.986.851.524.231.075.776.4

58.4136.6171.1

53.667.641.154.190.024.495.0

48.152.1

138.058.768.5

199.324.033.729.548.2

51.643.025.028.325.056.352.044.240.241.1

27.268.728.950.927.1

130.355.252.294.226.6

25.2%23.7%15.1%10.4%

9.9%9.5%9.4%8.7%8.2%7.9%

7.5%4.1%3.2%2.7%2.2%1.9%1.5%1.4%0.5%0.4%

0.3%–0.7%–0.7%–1.8%–2.9%–3.1%–3.3%–3.4%–3.4%–3.4%

–3.5%–3.7%–4.0%–4.5%–4.6%–5.3%–7.2%–7.5%–7.6%

–10.1%

–10.2%–11.8%–15.2%–15.2%–16.4%–17.8%–20.9%–26.8%–40.0%–44.6%

24.2%17.5%10.3%10.5%10.5%

7.5%10.1%

7.7%8.4%9.2%

5.9%2.7%3.3%3.1%3.0%

–0.1%2.5%1.4%1.0%0.2%

1.4%0.2%

–0.1%–2.6%–4.3%–3.3%–4.3%–4.2%–2.0%–0.8%

–2.7%–3.8%–2.7%–3.8%–5.7%–1.9%–8.5%–9.3%–7.2%

–11.2%

–5.2%–10.4%–13.2%–20.1%–12.9%–16.3%–25.5%–33.7%–46.2%–61.8%

26.7%44.5%37.2%11.7%11.2%16.8%10.7%31.9%17.6%16.1%

31.3%10.8%

4.5%2.2%

11.1%10.8%

9.3%23.9%

1.7%5.3%

7.9%8.0%0.5%4.0%3.4%3.3%8.0%

–2.2%4.0%

–2.3%

4.9%–2.6%

3.4%6.7%6.6%

–5.8%–2.7%–2.2%–6.6%–5.7%

–12.9%–14.4%–17.8%

–9.6%–18.9%–16.9%–16.2%–22.0%–39.3%–40.9%

++++++++++++++++++

+++++++

++++++++++++

+++++++

++

++++++++

+++++

++

++++++++

++–+–

+–+

++++– –––

– –– –

– – –– – –

– – – –– –

– – – –– – – –– – – –– – – –– – – –– – – –

–+++

++++––+–

++++++++

+++++–

– –++++++

++++–+

++++–+++

++–

++–

++–

++++++– –++–+

– –– –– –+

– ––++–+

– ––

++–

– –– –– –+

++++++

+– –++

++– –+++

+–+

+++++––

– –++

++++++

– – –

++++

++++++

– – –– – –– –––

– – ––

– –– – – –

– –– – – –– – –– – –

– – – –– – – –

123456789

10

11121314151617181920

21222324252627282930

31323334353637383940

41424344454647484950

3219233435

1259

2024

2014141411

Banco SantanderGoldman SachsCommonwealth Bank of AustraliaBNP ParibasCredit Suisse Group

6512

1011

815

379

4132430121416

63122

19173225272918342635

23362820213937334038

42434641474544484950

2005–2009

From('04–'08)

To('05–'09)

Positions gained Company

Largest increase

221127

820

4532432334

–23–21–16–15–14

Mizuho Financial GroupU.S. BancorpSumitomo Mitsui Financial GroupWells FargoHang Seng Bank

From('04–'08)

To('05–'09)

Positions lost Company

Largest decline

2009 Name

Company Performance 2005–2009

M' cap '09($billions)

Country RTSRp.a.

RTSR rank

Alphap.a.

TSRp.a.TSR Market Risk Rank

Seg-ment

AM Asset managers MF Mortgage finance Relative total shareholder returnCF Consumer finance TSR:

RTSR:Total shareholder return – – – – (++++) strongly negative (positive)

IB Investment banksUB Universal banks

Risk: Volatility of returns compared to domestic market (β) – – – – (++++) very high (low)Market: Stock-specific impact of overall market – – – – (++++) strongly negative (positive)

Large-Cap Banking Companies


Türkiye Garanti BankasiCIMB Group HoldingsT. Rowe PriceTD AmeritradeSiam Commercial BankHousing Development Finance CorporationBank Central AsiaHDFC BankBank Rakyat IndonesiaAkbank

OCBC BankNorthern TrustPKO Bank PolskiNational Bank of GreeceBank MandiriNational Bank of CanadaShinhan BankUnited Overseas BankGrupo Financiero InbursaIGM Financial

Svenska HandelsbankenICICI BankAbsaBank Polska Kasa OpiekiMediobancaState StreetMacquarie GroupThe Standard Bank of South AfricaUBI BancaWoori Finance Holdings

KB Financial GroupTürkiye Iş BankasiDnB NORFirstRandErste BankBB&TBanca Monte dei Paschi di SienaDanske BankMalayan BankingKBC

Resona HoldingsSEBSuncorp-MetwayNatixisBanco Popular EspanolCapital OneSwedbankCommerzbankSuntrust BanksDexia

TURMYSUSAUSATHAINDIDNINDIDNTUR

SGPUSAPOLGRCIDNCANKORSGPMEXCAN

SWEINDZAFPOLITAUSAAUSZAFITAKOR

KORTURNORZAFAUTUSAITADNKMYSBEL

JPNSWEAUSFRAESPUSASWEGERUSABEL

UBUBAMIBUBMFUBUBUBUB

UBUBUBUBUBUBUBUBUBAM

UBUBUBUBUBAMIBUBUBUB

UBUBUBUBUBUBUBUBUBUB

UBUBUBUBUBCFUBUBUBUB

74

1220172444313519

16433610115

22344029

1518252827388

23426

13333

321445492

2137

4830411

47269

465039

17.813.213.711.4

8.816.412.616.6

9.918.9

21.012.614.515.810.4

9.317.621.4

9.710.6

17.821.012.514.810.321.514.621.6

9.29.6

19.812.917.714.014.117.4

9.815.914.215.6

12.213.6

9.914.8

9.817.2

9.310.010.111.3

16.1%13.9%12.0%11.0%

8.1%7.4%7.4%5.2%3.8%2.5%

2.4%2.1%2.1%2.0%1.8%0.7%0.5%0.4%

–0.1%–0.4%

–0.4%–0.6%–1.5%–1.6%–1.7%–2.4%–2.6%–2.8%–2.8%–2.9%

–3.8%–3.9%–4.7%–4.8%–6.1%–6.2%–6.4%–7.7%–8.0%

–11.2%

–11.8%–12.9%–13.3%–13.4%–14.0%–14.4%–16.7%–20.2%–20.9%–22.7%

10.2%10.7%13.2%11.1%

8.2%9.5%

12.4%7.5%0.0%

–1.3%

2.0%1.7%0.7%4.6%

–3.2%2.3%0.1%0.4%5.7%

–0.1%

–0.2%–5.0%

3.2%–3.5%–1.5%–1.7%–7.8%–1.6%–3.1%–6.8%

–6.1%–6.8%–4.4%–4.3%–5.1%–6.6%–6.8%–8.4%–7.9%

–10.3%

–12.3%–15.4%–14.8%–15.9%–15.5%–13.5%–21.4%–25.1%–22.8%–24.1%

35.4%26.2%13.3%12.3%15.9%30.4%30.8%27.6%26.4%19.6%

14.4%3.3%

10.9%0.0%

24.0%8.4%

15.4%12.2%21.0%

7.3%

8.3%20.6%16.2%

6.9%–2.1%–1.2%

5.9%14.7%–3.3%11.5%

10.5%12.1%

5.9%12.3%–4.9%–5.1%–6.9%–3.6%

1.9%–9.9%

–14.4%–5.4%–5.7%–9.2%–8.4%

–13.4%–9.5%

–15.6%–20.0%–21.5%

++++++++++++++

++++++++++++++++++++++++

++++

+++–

++++++

+++++++

++++++

++++++++++

++––

+++++

–+++

++++++++

+++–

– –– ––+

– –

– – –– –– –– –– –

– – –– –

– – – –– – – –– – – –

– –– –

– – –– –++

+++

– –– –

–+

– –– –– –+++

–+

+++

+– –++– ––

– –– – – –

++

– –

– –– –++

– –++

– –+

– – –

–– ––

– – – ––

– – –– – –

– – – –– –

– – –

+++++––

+++++++++++++++++++++

++–

++– –

++++++

+++++

++++++

+++++++++++– ––

+++++– –+++

++++++++

+++––

– –+

++–

– –++++++–

+++––

123456789

10

11121314151617181920

21222324252627282930

31323334353637383940

41424344454647484950

3624254532

1611133321

2013121211

National Bank of CanadaOCBC BankPKO Bank PolskiDnB NORSvenska Handelsbanken

16

161712

3245

10

15302232

7241319

826

259

1127343329143521

23202818373841363145

47394043424644484950

179

1422

8

4123283419

–24–14–14–12–11

Resona HoldingsAbsaThe Standard Bank of South AfricaFirstRandGrupo Financiero Inbursa

AM Asset managers MF Mortgage finance Relative total shareholder returnCF Consumer finance TSR:

RTSR:Total shareholder return – – – – (++++) strongly negative (positive)

IB Investment banksUB Universal banks

Risk: Volatility of returns compared to domestic market (β) – – – – (++++) very high (low)Market: Stock–specific impact of overall market – – – – (++++) strongly negative (positive)

From('04–'08)

To('05–'09)

Positions gained Company

Largest increase

From('04–'08)

To('05–'09)

Positions lost Company

Largest decline

2005–2009 2009 Name

Company Performance 2005–2009

M' cap '09($billions)Country RTSR

p.a.

RTSR rank

Alphap.a.

TSRp.a.TSR Market Risk Rank

Seg-ment

Mid-Cap Banking Companies

After the Storm 27

For each country, the five largest banks, by market capitalization, are listed, except for the United States, for which the 15 largest banks are listed.

17.6%11.1%

8.0%5.9%4.9%

16.1%9.3%7.9%4.0%3.4%

5.3%

–2.7%–5.7%–7.1%–9.2%

–2.2%–5.0%–8.6%

–10.7%–15.6%

2.2%

–2.1%–3.3%–5.8%–6.9%

–12.9%–14.4%–14.4%–17.8%–18.9%

10.8%3.4%1.8%1.2%

–8.4%

21.3%16.4%15.3%4.0%

–16.2%

16.8%3.3%

–9.6%–22.0%–40.9%

26.7%11.7%11.2%10.7%4.5%1.7%0.5%

–1.2%–2.2%–2.3%–2.6%–5.1%–6.6%

–16.9%–39.3%

75.767.652.114.651.6

76.454.148.129.525.0

95.052.041.1

0.714.8

44.27.21.20.8

10.0

53.610.3

9.256.3

9.8

27.268.712.228.927.1

136.668.5

4.96.79.8

3.43.32.5

58.755.2

51.5199.3

50.952.226.6

43.821.986.824.2

171.124.4

138.021.533.748.243.017.440.2

130.394.2

12345

12345

12345

12345

12345

12345

12345

12345

12345

123456789

101112131415

Commonwealth Bank of AustraliaWestpac BankingAustralia and New Zealand Banking GroupMacquarie GroupNational Australia Bank

Royal Bank of CanadaThe Toronto-Dominion BankThe Bank of Nova ScotiaBank of MontrealCanadian Imperial Bank of Commerce BNP ParibasSociété GénéraleCrédit AgricoleCrédit Agricole d'Ile de FranceNatixis Deutsche BankDeutsche PostbankMLPAareal BankCommerzbank .Intesa SanpaoloMediobancaUBI BancaUniCreditBanca Monte dei Paschi di Siena Nomura HoldingsMitsubishi UFJ Financial GroupResona HoldingsSumitomo Mitsui Financial GroupMizuho Financial Group Banco SantanderBBVABankinterBanco de SabadellBanco Popular Espanol Banque Cantonale VaudoiseValiantGAM HoldingCredit Suisse GroupUBS Standard Chartered BankHSBCBarclays BankLloyds Banking GroupThe Royal Bank of Scotland BlackRockCharles SchwabGoldman SachsFranklin Templeton InvestmentsJPMorgan ChaseThe PNC Financial Services GroupWells FargoState StreetThe Bank of New York MellonAmerican ExpressU.S. BancorpBB&TMorgan StanleyBank of AmericaCitigroup

UBUBUBIBUB

UBUBUBUBUB UBUBUBUBUB UBUBIBMFUB UBUBUBUBUB IBUBUBUBUB UBUBUBUBUB UBUBAMUBUB UBUBUBUBUB AMIBIBAMUBUBUBAMAMCFUBUBIBUBUB

Name M' cap '09($billions)Segment TSR p.a.

TSR '05–'09Company

RankCountry

Australia

Canada

France

Germany

Italy

Japan

Spain

Switzerland

United Kingdom

United States

AM Asset managers MF Mortgage financeCF Consumer finance IB Investment banks UB Universal banks

Ranking by Country


T he analyses in this report are based on a sample of 549 stock-market-listed universal and specialized companies in the banking industry. The companies include all major banking companies and represent roughly

75 percent of the industry’s total market capitalization as of January 2010.

Five segments are distinguished in the sample: universal and diversified banks with a broad business portfolio; investment banks (providers of capital markets services and corporate-finance services); asset managers (providers of retail broker services and money man

agement, including investments, budgeting, banking, and taxes); consumer finance businesses (credit card companies and providers of personal financial services); and mortgage finance companies (providers of mortgages and mortgage insurance). Companies were categorized in these segments according to their dominant business focus.

Most of the historical capital-market and fundamental data for the sample were acquired from Thomson Reuters Datastream. Bloomberg consensus forecasts, if available, were used to fill gaps in data for 2009, with estimated data as of January 22, 2010.

Appendix: Sample and Methodology

Sources: Thomson Reuters Datastream; BCG analysis.

Asset managers 29Consumer finance companies 17Investment banks 57

Mortgage financecompanies 4Universal banks 442Total 549

20

81187

189

49

167

The Sample Includes 549 Companies in Different Regions and Segments

After the Storm 29

The report uses several different measures to gauge value creation.

Total shareholder return (TSR). TSR measures the change in a company’s stock price and gains from reinvesting dividends paid in a particular period. It is the percentage change of the return index on a given stock. Global and regional TSRs were calculated in U.S. dollars. All country and individual company TSRs in this report were calculated in local currencies.

Relative total shareholder return (RTSR). Like TSR, RTSR measures shareholder returns based on capital gains and free-cash-flow yield, but it adjusts a company’s TSR to account for the impact of the local stock market. This is important when drawing comparisons among companies in different countries. For example, one company’s performance could be buoyed by a bull market, whereas another company’s performance could be dampened by a bear market.

Alpha. This measure adjusts a company’s excess return for the volatility of stock relative to the local market. Alpha accounts for the expectation that companies that take on greater risks will have greater returns. This adjustment makes it easier to compare, for example, the performance of a diversified universal bank (which has relatively low risk) with the performance of an investment bank (which has relatively high risk).

These two dimensions reveal how and why a company’s true capital-market performance might vary from its TSR. When converted to RTSR, for example, a com

pany’s TSR will be adjusted upward if it posted strong gains despite a poorly performing local market. Alpha adjusts the company’s excess return downward if the business involves greater underlying risk. If a company has a high RTSR and a low or negative alpha, it means that although the stock outperformed the local market, the return was not high enough to compensate for the risk taken by the investors.

The formal definition of RTSR for stock S in local market M is as follows:

RTSR(S,M) = (1 + TSR(S)) / (1 + TSR(M)) – 1

The formal definition of alpha for stock S in local market M is as follows:

α = ri(S) – (rf + (μm – rf) • β(S))

where alpha is the excess return of stock S, calculated by the difference of the realized return of the stock ri(S) above what would be predicted by the capital asset pricing model (CAPM). The CAPM predicts the expected return of stock S. It includes:

The risk-free rate r◊ f.

The excess return of the market◊ (μm – rf ) • β(S), derived from the average return of the domestic market M, μm, over rf, and β, which is the volatility of stock S compared to the domestic market M; alpha directly measures the percentage excess return of the stock.


For Further Reading

The Boston Consulting Group publishes other reports and articles that may be of interest to senior financial executives. Recent examples include:

Collateral Damage, Part 8: Preparing for a Two-Speed World: Accelerating Out of the Great RecessionA White Paper by The Boston Consulting Group, January 2010

Retail Banking: Winning Strategies and Business Models Revisited A White Paper by The Boston Consulting Group, January 2010

The Near-Perfect Retail BankA White Paper by The Boston Consulting Group, November 2009

Delivering on the Client Promise: Global Wealth 2009A report by The Boston Consulting Group, September 2009

Building an Operating Model for the Next-Generation Investment BankA White Paper by The Boston Consulting Group, July 2009

Conquering the Crisis: Global Asset Management 2009A report by The Boston Consulting Group, July 2009

Collateral Damage, Part 7: Green Shoots, False Positives, and What Companies Can Learn from the Great DepressionA White Paper by The Boston Consulting Group, June 2009 The Clock Is Ticking: Preparing to Seize M&A Opportunities While They LastA White Paper by The Boston Consulting Group, May 2009

Collateral Damage, Part 6: Underestimating the CrisisA White Paper by The Boston Consulting Group, April 2009

Collateral Damage, Part 5: Confronting the New Realities of a World in CrisisA White Paper by The Boston Consulting Group, March 2009

The Next-Generation Investment BankA White Paper by The Boston Consulting Group, March 2009

Living with New Realities: Creating Value in Banking 2009A report by The Boston Consulting Group, February 2009

Thriving in the New Normal: Corporate Banking 2008/2009 A report by The Boston Consulting Group, December 2008

After the Storm 31

Note to the Reader

AcknowledgmentsThis report would not have been possible without the support we received from BCG’s Financial Institutions practice area, including its global leader, David Rhodes. We called on our experts from around the world to understand the development of banking in various countries: Matthew Rogozinski (Australia), Kilian Berz and Jürgen Schwarz (Canada), Lionel Aré (France), Gerold Grasshoff and Walter Sinn (Germany), Massimo Busetti (Italy), Kosuke Kato ( Japan), Stephan Dertnig and Thomas Herbeck (Russia), Luis Gravito (Spain), Matthias Naumann (Switzerland), Andy Maguire and Toby Owens (the United Kingdom), and Ashwin Adarkar, Ian Frost, and Monish Kumar (the United States).

We are also grateful to our colleagues who provided insights on specific regions or issues. Jorge Becerra, Federico Muxi, and André Xavier shared their views on Latin America. Reinhold Leichtfuss described the banking landscape in the Middle East. To develop a perspective on the new regulatory regime, we relied on Thomas Bulach and Duncan Martin.

Finally, the authors would like to thank the project team—Carina Hellak and Matthias Wefelnberg—and the following members of BCG’s editorial and production staff: Barry Adler, Gary Callahan, Dan Coyne, Elyse Friedman, and Ellen Treml.

For Further ContactFor further information about this report or to learn more about BCG’s capabilities in financial services, please contact one of the authors:

Ranu DayalSenior Partner and Managing DirectorBCG Singapore+65 6429 [email protected]

Lars-Uwe LutherPartner and Managing DirectorBCG Berlin+49 30 2887 [email protected]

Peter NeuPartner and Managing DirectorBCG Frankfurt+49 69 9150 20 [email protected]

Tjun TangPartner and Managing DirectorBCG Hong Kong+852 2506 [email protected]

For a complete list of BCG publications and information about how to obtain copies, please visit our Web site at www.bcg.com/publications.

To receive future publications in electronic form about this topic or others, please visit our subscription Web site at www.bcg.com/subscribe.

02/2010

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