Top 10 Largest Banks in the World

It is not surprising that top ten largest banks in the world by market value in October 2010 are dominated by the “big-four” banks from China.  Industrial and Commercial Bank of China (ICBC) remains the largest with a market value of $240 billion dollars, closely followed by China Construction Bank (CCB).  Bank of China (BOC) is No. 6, surpassed by Agriculture Bank of China (ABC).  ABC went public in July 2010 with the world’s largest IPO of $23.1 billion at both Shanghai Stock Exchange and Hong Kong Stock Exchange, breaking the previous IPO record set by ICBC in 2006.  Compared to the top 10 list of 2008, the positions of these large Chinese banks have changed little.  Hong Kong and Shanghai Banking Corporation (HSBC) maintained its No. 3 position through extensive worldwide banking.  From its name, one can hardly imagine that HSBC is actually a British bank.  As a matter of fact, HSBC is seriously considering to move its headquarter from London to Hong Kong to avoid the hostile business environment toward financials and banks in Europe.

What is surprising is that, after the worst hit from the mortgage crisis and severe depression from hostile regulations and politicians, there are still 4 major US banks staying on the top 10, JP Morgan Chase, Wells Fargo, Citibank, and Bank of America, primarily through blood merger and government bailouts.  Wells Fargo moves up its ranking from rising in market value.  On the down side, Bank of America (BAC) has dropped like a falling rock as a result of sharp decline in its share price.  BAC was No.2 in 2008 but slides to No. 9 in 2010, in spite of major acquisitions including the largest home loan lender Countrywide Financial and top investment bank Merrill Lynch.

Five to ten years ago, the top 10 banks list looked completely different, see the 2006 and 1999 lists below.  All the top banks were from US, Europe and Japan.  Citibank was No. 1, Bank of America was No. 2, and HSBC was No. 3.  No one heard of ICBC, CCB, or even Bank of China outside of China.  Yes, these banks were controlled by state and were not publicly traded.  However, the primary reason that these Chinese banks were not on the top list was they had been in deep trouble.

Back in 2005, state controlled big Chinese banks were facing serious bad loan crisis.  Just “big four” banks alone were holding $125 billions of bad loans, or 10% of their total loans.  Nonperforming loans might make up 50% of all loans and eat up to 15-30% of entire Chinese GDP.  Many feared the true figures could be much higher and the entire banking system would eventually collapse, crushing the fast growing Chinese economy. 

Hi, Americans, do these sound familiar?

Facing the enormous pressure, China had no choice but to put critical efforts to clean up these banks.  First, the state poured extra funds into banks.  From 1998 to 2005, $105 billion were injected into the top three banks.  Second, more than $300 billions of bad loans were transferred into asset-management companies, a strategy borrowed directly from the US.  Third, China opened its banks and markets to the top international banks.  Major foreign banks, such as Citibank and HSBC, etc., could directly open branches in big Chinese cities.  In addition, these foreign banks were also invited to invest and take major stakes in the state owned banks.  By doing this, Chinese banks could get badly needed cashes immediately, and more importantly, they could establish a sound banking and financial system in China by following the good business model run in these top international banks.  These drastic reforms and strict disciplines, along with the international managing guidelines, have quickly turned around the Chinese banking system.  By 2007, bad loans had been sharply dropped to less than 3% of total bank loans.

Obviously, the rapid recovery of these Chinese banks and the fast growth of the banking business have made the initial investments of the international banks grow significantly, returning hefty profits for the US banks in difficult situation today.  In fact, BOA, Goldman Sachs and Morgan Stanley all had to unwillingly sell their stake holdings in the big Chinese banks, raising life saving cashes to repay the US TARP.  It was a painful decision for the US banks since for sure these shares will be worth a lot more in the years to come. 

Investment Profits or Losses between US and Chinese Banks

Bank	Target Bank	Year	Stake	Invest, $M	Worth Now, $M	Profit (Loss), $M
Citibank	SPD Bank	2008	2.7%	73	840	767
Goldman Sachs	ICBC	2006	4.9%	2,600	11,760	9,160
America Express	ICBC	2006	0.4%	200	960	760
Bank of America	China Construction Bank	2005	8.5%	2,500	18,744	16,244
		2008	10.6%	7,000	23,386	16,386
Morgan Stanley	C International Capital	1995	34.3%	35	1,000	965
China Investment	Morgan Stanley	2007	9.9%	5,000	3,465	(1,535)
China Investment	Blackstone	2007	9.4%	3,000	457	(2,543)

Now, the table has turned around.  It is the US banks and economy that are in deep water today, a similar crisis situation that China had five to ten years ago.  Can US banks and politicians open their minds, putting the business and US economy above all the bias and politics, to learn from the Chinese successful banking experience?  A good way is to invite the Chinese and other foreign banks to invest and to take major stakes in the troubled banks.  US Treasury is still holding 3.6 billion shares of Citibank common stocks today.  It can arrange a direct sale of this sizable holding to big Chinese banks.  BOA should also sell 10-20% of its stake to dramatically enhance bank's financial strength.  Most importantly, the banks, politicians and all the Americans must change their biased view and should have a positive attitude to let the Chinese and other foreign investments to profit over times. 

Looking at the table above, American banks have made the record profits from their Chinese banking investments.  Americans love these American Yuans.  Actually, Chinese government is pleased to see US banks are profiting from the American Yuans, so that more investments will come.  Chinese banks are also grateful to the great expertise learned from top international banking.  Moreover, the Chinese people are nowhere against the US banks since the booming Chinese banks have fueled to the rocket growth of the entire economy.  It is a textbook case for a great win-win situation.  However, this is in sharp contrast to the Chinese investment loss in American banks and financials, such as China Investment’s major stakes in Blackstone and Morgan Stanley, which had turned sour almost from day one.

Nevertheless, making money for everyone is not a guarantee in almost anywhere, including China and US.  Government, banks, politicians and the people all have to work hard together in order to reach a win-win strike.  If banks suffer, the entire economy will be depressed.  For the sake of US economy, government, banks, Republicans and Democrats alike should open and welcome the Chinese Dollars to invest in the troubled US banks, pushing for another round of win-win situation.

When US banks thrive, all Americans will benefit!