November 5, 2008
US and European banks – two sides of the same story? Think Tank of Deutsche Bank Group Jan Schildbach US and European banks – two sides of the same story? American Institute for Contemporary German Studies Washington, 23 October 2008 Agenda Consolidation 2 1 Introduction Diversification 3 Regulation 4 Conclusion 5 The Europeans catch up 6 8 10 12 14 16 18 19971998199920002001200220032004200520062007 USA Western Europe Sources: FDIC, OECD, ECB, national banking authorities, DB Research Post-tax return on equity of US and European banks % …and share the subprime losses 0 10 20 30 40 50 60 70 80 90 100 Wachovia Citigroup Merrill Lynch WaMu Bank of America UBS HSBC IKB RBS Credit Suisse Writedowns and credit losses in the subprime crisis USD bn Source: Bloomberg …but other countries‘ banks affected as well -75 -59 -55 -32 -30 -15 -9 -90-80-70-60-50-40-30-20-100 Sberbank (RU) BoCom (CN) Mizuho (JP) Mitsubishi UFJ (JP) Bank of China (CN) China Construction (CN) ICBC (CN) Market cap loss of emerging market and Japanese banks in the % change; Jun 12, 2007 to Oct 21, 2008 Sources: Thomson Financial, Bloomberg, DB Research credit crisis Agenda Consolidation 2 1 Introduction Diversification 3 Regulation 4 Conclusion 5 Consolidation side by side 0 2,000 4,000 6,000 8,000 10,000 12,000 19971998199920002001200220032004200520062007 USA EU-15 o/w Germany Number of banks Sources: FDIC, ECB, DB Research -41% -22% -29% A matter of size 0 1 2 3 4 5 6 7 8 9 10 USAEU-27EU-15o/w Germany Average bank size Total assets in USD bn, 2007 Sources: FDIC, ECB, DB Research 0 10 20 30 40 50 60 70 USA Other EU-15 Germany Size of banking markets Total assets in USD tr Sources: FDIC, ECB, DB Research 1997 2007 2.2x 3.3x 2.1x Does not include some investment banking assets in the US. Branching convergence 0 50 100 150 200 250 USAEU-15o/w Germany 1997 2007 Number of branches in '000s Sources: FDIC, ECB, DB Research 0 10 20 30 40 50 60 70 80 90 USAEU-15Germany 1997 2007 Branches per 100,000 inhabitants Sources: FDIC, ECB, Census Bureau, DB Research Large banks become more dominant – but not in regional markets in the US 0 10 20 30 40 50 60 70 USA*EU-25*EU-15*Germany 2001 2007 Sources: Federal Reserve, ECB, DB Research CR-5 (concentration) ratio % of total assets *USA: as of June 30, 2008 and incl. JPMorgan-WaMu and Wells Fargo-Wachovia transaction; EU: unweighted average 0 10 20 30 40 50 60 70 CaliforniaNew YorkFloridaTexasIllinois 1998 2008 % of deposits Sources: FDIC, DB Research Agenda Consolidation 2 1 Introduction Diversification 3 Regulation 4 Conclusion 5 …yet because of the interstate banking boom 0 5 10 15 20 25 30 35 40 45 Sep 1994Jun 1997Jun 2007Jun 2008 Number in '000s % of total branches Interstate branches of FDIC-insured institutions Sources: FDIC, DB Research 19x …pan -American banks emerge 0 5 10 15 20 25 30 35 40 NationsBankBankAmericaBank of America Wells FargoWachoviaWells- Wachovia 1998 2008 Sources: FDIC, DB Research Interstate banking at Bank of America and Wells Fargo Number of states with branches 3.8x 1.9x …that are domestic powerhouses but dwarfs abroad 9% 91% Domestic market Foreign markets Assets of the 20 largest US June 30, 2008; unweighted average banks by region Sources: Federal Reserve, DB Research Incl. JPMorgan-WaMu and Wells Fargo-Wachovia transaction 49% 25% 26% Domestic market Other Europe Rest of the world Revenues of the 20 largest European banks by region 2007, unweighted average Sources: Company reports, DB Research …while banks diversify revenues as well 0 10 20 30 40 50 60 70 USAGermanyFranceUKItaly 1996 2006 Non-interest income in % of total revenues Sources: FDIC, ECB, OECD, DB Research 0 500 1,000 1,500 2,000 2,500 2000200220042006YTD 2007 YTD 2008 RMBS CDO CMBS Auto ABS Other ABS Credit card ABS Global securitisation issuance USD bn Source: Deutsche Bank Agenda Consolidation 2 1 Introduction Diversification 3 Regulation 4 Conclusion 5 New regulation to cure financial markets? Higher capital requirements to reduce leverage: Putting (de)leveraging into perspective Off-balance sheet assets Basel II Refine capital requirements superior to leverage ratio Securitisation Mandatory retention not the only, not the best instrument Greater transparency on underlying needed Targeted higher capital charges worth discussing Relaxation of mark-to-market principle: Resistance from investors? Detrimental to re-establishing trust among banks? Need for internationally consistent rules New regulation (II) Re-thinking the role of ratings and rating agencies: Improve oversight? Make investors pay instead of issuers? Reduce role of ratings in regulation Limits to management compensation: Can’t owners judge best? Industry working on proposals to align compensation with long- term sustainable profitability Ban on short selling: Ineffective tool to stabilise markets Lowering financial market efficiency by impeding hedging Agenda Consolidation 2 1 Introduction Diversification 3 Regulation 4 Conclusion 5 Convergence of US and European banking markets: European banks closing in with regard to profitability US banks consolidating, few large players emerging European banks becoming more capital markets-oriented Regulation as a result of the financial crisis Differences to remain: US banks operate national, European banks international Ownership structures Summary & conclusion 0 5 10 15 20 25 30 35 40 45 GermanyPortugalPolandSloveniaSwitzerlandItalyNetherlandsUSAUK Government ownership of banks (majority holdings) %, 2005 Source: World Bank Public banking on the rise again Politicians the better bankers? 0 2 4 6 8 10 12 14 IKB BayernLB LBBW WestLB HSH Nordbank Sachsen LB Deutsche Bank Dresdner Bank DZ Bank Commerzbank Hypo Real Estate Writedowns and credit losses at public and private German banks USD bn Source: Bloomberg 113 702 42 29 48 32 18 18 18 9 24 % of total pre- crisis equity Jan Schildbach Deutsche Bank Research Banking, Financial Markets, Regulation Theodor-Heuss-Allee 70 D-60486 Frankfurt/Main Germany Phone:+49-69-910-31717 Fax: +49-69-910-31743 E-mail: firstname.lastname@example.org Contact © Copyright 2008. 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