Change of guard in banking powerhouses

The unprecedented turmoil and near collapse in the international banking system has brought a significant change of the world order in banking powerhouses. Nearly all worldwide banking stocks have been hit by falling confidence, deteriorating earnings outlook, and weakening capital levels, which, combined, has led to plummeting stock prices.

However, the big hits have been where the credit and toxic asset problems are located, or where banks have exposure to the problematic assets, that is the US and the UK.

Former flagship financial institutions, such as Citigroup, have been justifiably punished for their balance sheet and financial problems. Citigroup has reported $20.3 billion (Dh74.5bn) in net losses and taken more than $64bn in credit losses and write-downs since December 2007. Citigroup was not so long ago the world's largest bank. However, its market capitalisation is now valued at $15bn, ranking 22 in the world. Citigroup now has a lower market capitalisation than Saudi's Al Rajhi Bank, whose market value is currently $23bn.

The market capitalisation of Bank of America has also declined significantly and is the latest bank in talks with the US government, and may receive $15bn in additional bailout funds.

Across all markets, China has the two largest banks. The Industrial and Commercial Bank of China has a market capitalisation of $167bn, and China Construction Bank with a market capitalisation of $115.1bn. The third largest Chinese bank, The Bank of China, has capitalisation of $96bn.

Outside China, the largest bank is now HSBC, the British but global-focused institution which is valued at $101bn. US banks JP Morgan Chase and Wells Fargo follow based on market capitalisation with $91bn and $84bn respectively.

British banks have been particularly decimated by the crisis and the eventual nationalisation of a large chunk of the system. In 2007, the Royal Bank of Scotland had a market cap of $140bn. It is now just $7.6bn. RBS' losses for 2008 are likely to between £22bn-£28bn due to losses on complex debt instruments and a write-down of goodwill on acquisitions including ABN Amro.

Royal Bank of Scotland's market capitalisation is now lower than a number of Gulf banks including Samba Bank (market capitalisation $10bn), Riyad Bank ($8bn), Qatar National Bank ($7bn) and National Bank of Kuwait ($8bn).

And this is despite the fact that Gulf bank shares have also suffered over the last year, with many down by over 50 per cent. However, although the earnings outlook is very tough, they are still nonetheless still profitable.

The UK's Barclays has been hammered as doubts continue about its independence. Prior to the crisis, its market capitalisation was more than $100bn. It is now just $7.4bn, again below a number of Gulf banks.

There are now only 13 AA-rated banks in the world, compared with 20 when the global financial crisis emerged. More downgrades are likely as further asset write-downs are expected.

Big banks which have avoided the toxic assets have shot up the world rankings. The banking crisis in the world's financial system has seen Australia's big four banks move into the top 20 global banks for the first time. Despite challenges on their funding and increasing non-performing loans, they remain highly profitable while many banks internationally seek government handouts, are nationalised or allowed to collapse.

Rising up the rankings in world bank market capitalisation is important as provides more business opportunities as well as the focus of international investors. It increases a bank's activities in foreign exchange trading, both in terms of volumes and deal size, and can raise its reputation amongst counterparties.

The foreign exchange market is increasingly profitable as there are fewer banks participating and the pricing has become more attractive.

- The writer is a US-based commentator on business issues