Hang Seng Bank can offer some advice to its ailing parent, HSBC Holdings: Stay local, stick to retail and commercial banking, and serve your customers snake soup. From its base in Hong Kong, Hang Seng tops Bloomberg Markets’ ranking of the world’s strongest banks for the second year in a row—by being everything HSBC isn’t. While the two share roots in Hong Kong, HSBC embarked on a global expansion to become Europe’s largest lender. It moved its headquarters to London in 1993 and set up shop in almost every major country.
Now, HSBC is struggling to reduce costs. The 150-year-old bank, which bought its first stake in Hang Seng in 1965 and today owns 62 percent, has announced about 87,000 job cuts since 2011. “The time of the global financial conglomerates is coming to an end,” says Ismael Pili, a Hong Kong–based analyst at Macquarie Group who rates Hang Seng underperform. “What you should really be doing is trying to be strong in your domestic market.” Gareth Hewett, an HSBC spokesman in Hong Kong, declined to comment.
Hang Seng is embracing that strategy, Bloomberg Markets magazine reports in its September issue. It has peppered Hong Kong’s subway stations and malls with its lime-green signage. More than half of residents 18 and older bank at its 240 outlets in Hong Kong. That presence makes Hang Seng Hong Kong’s No. 2 bank in terms of branches and provides a solid base of deposits from which to expand corporate lending and wealth management. CEO Rose Lee, 62, caters to her most-valued clients in the company’s 24th-floor dining room over a broth infused with five kinds of finely chopped snake meat. Hong Kongers swear the brew nourishes their blood.
The invigorating powers of snake soup aside, Hang Seng is benefiting from rising wealth in Hong Kong and mainland China. It’s one of six Asian banks in Bloomberg’s top 20—five of them in the top 10. Japan’s Norinchukin Bank repeats in second place, after having tied for that spot a year ago. Singapore’s Oversea-Chinese Banking is No. 3 in our fifth annual ranking of lenders whose assets total $100 billion or more. Two other Singapore banks are ninth and 10th.
Across Asia, the International Monetary Fund expects gross domestic product growth to average 5.6 percent this year, triple the European Union’s 1.8 percent. And Asia’s rich are getting richer. The 4.69 million individuals in the Asia-Pacific area with at least $1 million in assets boosted their combined wealth 11 percent last year to a total of $15.8 trillion, the fastest pace in the world, Royal Bank of Canada and Cap Gemini say. “Asian banks stand out because of the huge wealth creation in the region,” says Arthur Kwong, head of Asia-Pacific equities at BNP Paribas Investment Partners in Hong Kong. “A lot of the banks are well capitalized.”
Asia’s strongest lenders, and their global counterparts, are improving the quality of their capital. Cooperative bank Norinchukin lost 572 billion yen ($4.6 billion) in the fiscal year that ended in March 2009 when it bet the cash of its members, mostly farmers and fishermen, on toxic U.S. mortgage-backed securities. Today, CEO Yoshio Kono is investing in high-grade bonds at home and abroad, including sovereign debt. “Our goal is to keep capital at a level that’s sufficiently above what is required globally,” says Shinichi Saitoh, a senior managing director at Norinchukin. The bank has a 17.6 percent ratio of Tier 1 capital to risk-weighted assets for the ranking period, putting it fifth in the high-quality-capital category that includes equity and some subordinated debt.
The Basel Committee on Banking Supervision has been pushing all banks to improve capital standards. The latest measures, known as Basel III, more than triple the minimum amount of core capital lenders need to at least 7 percent of their risk-weighted assets. National regulators can set stricter rules. Bloomberg’s ranking considers capital strength among its five ranking criteria. The others are nonperforming assets, loan-loss reserves, deposits, and efficiency. Bloomberg is displaying a bank’s assets in the chart for the first time this year.
If Hang Seng has a weakness, it’s mainland China. Its Shanghai-based unit has about 50 outlets in major cities. The bank focuses largely on Hong Kong companies that want to do business on the mainland rather than on retail customers. Those companies are facing slowing growth: China’s GDP increased 7.4 percent last year, down from an average of 9.8 percent during the past four decades. Chinese banks’ bad loans surged in the first quarter by the most since at least 2004, with defaults spreading to state-owned giants. Because of China, Hang Seng more than doubled its provision for bad loans last year to HK$1.14 billion ($147 million). Even so, it isn’t retreating from the world’s second-largest economy. “We won’t scale back our China business,” Lee said during an earnings press conference in February. “Instead, we will focus more on customers that are doing business in both China and Hong Kong.” She declined to comment for this story.
Capital strength buoyed the top banks of Europe. No. 13 Swedbank suffered the biggest losses of any major lender in the Nordic countries in 2009. CEO Michael Wolf took the helm that March and raised a total of 27.5 billion kronor ($3.2 billion) in two share sales to improve the bank’s capital ratio. Today, Swedbank is the ranking’s best capitalized, with a 22.4 percent Tier 1 capital ratio.
Europe tied Asia with six lenders in the top 20—thanks primarily to Nordic banks. Sweden’s regulator has been raising capital requirements for the biggest banks since 2011. Swedbank and two other Swedish banks posted the highest capital ratios in our ranking. “Nordic banks are as safe as they could be,” says Wilhelm Heinrichs, a fund manager at Allianz Global Investors in Frankfurt.
It wasn’t always that way. Annika Falkengren, chief executive of No. 12 SEB, is focusing on high-quality capital and cautious domestic lending after leading the bank through the financial crisis. When Falkengren, 53, became CEO in 2005, she says, she knew of potential risks in the Baltic states of Estonia, Latvia, and Lithuania from a credit-fueled housing boom. But she didn’t anticipate the shock that followed Lehman Brothers’ bankruptcy in 2008. To shore up the bank after losses in the Baltics, Falkengren raised 15.1 billion kronor in a 2009 share sale. She cut 1,500 jobs and reduced the bank’s reliance on short-term borrowing to improve its funding profile. Then she began building capital buffers and has continued to bolster equity to this day. “Ever since Lehman, I had a very strong focus on creating a rock-solid balance sheet,” Falkengren says.
At the end of 2014, SEB had a 19.5 percent Tier 1 capital ratio, a low ratio of nonperforming assets to total assets, and a 15.3 percent return on equity, profitability most major European banks can only dream of. HSBC and Deutsche Bank, Germany’s biggest bank by assets, are struggling to hit 10 percent.
Falkengren remains careful as she seeks to grow in the Nordic countries and Germany and slowly moves into the U.K. In corporate banking, SEB lends mainly to blue-chip clients such as Electrolux, Europe’s biggest home appliance maker, and others it knows well. For retail customers, it’s limiting the sum Swedes can take out in mortgage loans to five times their household’s gross annual income. “We’re trying to make sure our clients are not taking too much risk,” she says.
Like Hang Seng and Norinchukin, Singapore’s strongest banks are targeting markets they know well. That’s helping them curb bad debts and build a strong capital base, says Jean-Charles Sambor, Asia-Pacific director at the Institute of International Finance. The Tier 1 capital ratio at Oversea-Chinese Banking and the other Singapore banks exceeded the Basel III guideline at the end of 2014.
Oversea-Chinese Banking, Southeast Asia’s second-largest lender by market value, has ambitions beyond plain banking in Asia. It operates in 18 countries and territories from Malaysia to China and was among the first to reopen a branch in Myanmar this year after 49 years of military rule. “Our strategic direction is to become a leading, well-diversified Asian financial services group with a broad geographical footprint,” CEO Samuel N. Tsien says. He says the ability to get funding and revenue from both developed and emerging Asian markets helps stabilize the bank’s capital base when regional economies fluctuate.
Canada, which dominated the 2012 ranking that considered banks’ 2011 fiscal years, has two entries in the top 20: Desjardins at No. 5 and Canadian Imperial Bank of Commerce at No. 18. CIBC is the only North American bank to appear in the ranking all five years.
The U.S. has three entries: newcomer Capital One Financial in McLean, Virginia, at No. 6; No. 14, Citigroup; and No. 15, Winston-Salem, North Carolina–based BB&T, the ninth-largest U.S. commercial bank by assets. New York–based Citigroup, the world’s twelfth-largest bank in terms of assets in the ranking period, is the only large global lender among the 20 strongest. The biggest U.S. banks by assets, led by JPMorgan Chase and Bank of America, didn’t make the list.
Capital One—with its quirky ads that ask, “What’s in your wallet?”—gets its strength from U.S. consumers and their prolific credit card spending and abundant auto loans. Richard Fairbank, the only CEO of a top U.S. lender who’s still running the company he founded, has transformed the business. Starting with a credit card consulting firm in 1988, Fairbank has built one of the biggest U.S. regional banks and consumer finance companies. His method: announcing acquisitions including Hibernia in 2005, North Fork Bancorp in 2006, and biggest U.S. online lender ING Direct in 2011.
Capital One’s consumer push helped it top the loan-loss-reserves-to-nonperforming-assets category. It’s benefiting from low credit card delinquencies as U.S. banks’ quarterly write-offs on the cards slid to less than 3 percent last year, the U.S. Federal Reserve says. The bank’s consumer focus has also brought scrutiny. In 2012, the Consumer Financial Protection Bureau ordered Capital One to pay $210 million to settle charges of deceptive marketing of such credit card products as identity theft monitoring. The bank didn’t admit or deny wrongdoing. The U.S. Justice Department and others are investigating Capital One’s subprime-auto-financing business. Julie Rakes, a spokeswoman for Capital One, declined to comment.
Another newcomer, National Commercial Bank, joins the top 20 at No. 4, the only Saudi Arabian lender ever to make the ranking. Controlled by the government, it’s the second-largest Middle Eastern bank, with assets of almost $120 billion. Saudi oil wealth—a projected $172 billion in export revenue this year—buoys the bank: About 8.4 percent of its deposits, or 28 billion riyals ($7.5 billion), come from the government.
NCB has taken a conservative approach to investments. Its rising nonperforming loans, a significant portion made to the former owners, led the government to take over the bank in 1999. Since then, it’s pushed into Saudi Treasuries and expanded retail outlets. “The bank has maintained a very liquid balance sheet,” says Murad Ansari, director of equity research at EFG Hermes Holding in Riyadh, Saudi Arabia. “It uses its scale to its advantage, whether that’s in retail, where it can attract inexpensive deposits and do more lending, or in corporate, where it uses its large equity base to do bigger deals.” The bank could suffer from declining oil prices and slow loan growth amid an economic downturn, Ansari says.
Even top banks in Asia face similar risks. Sluggish credit growth, rising competition, nonperforming loans, and the challenge of maintaining high-quality capital are potential problems, BNP’s Kwong says. Macquarie’s Pili attributes his underperform rating on Hang Seng to its declining interest margins and shrinking market share in nonconsumer loans, among other things.
For Rose Lee and Hang Seng, such issues might mean it’s time to reach out to clients over a few more bowls of strength-promoting snake soup.
How We Crunched the Numbers
To identify the world’s strongest banks, we used the Equity Screening (EQS) function on the Bloomberg Professional service to obtain a list of public and private banks with total assets of $100 billion or more as of June 1. The banks were evaluated in five categories. The ratio of a bank’s Tier 1 capital to its risk-weighted assets accounted for 40 percent of each bank’s overall score. The ratio of nonperforming assets to total assets got a weighting of 20 percent, as did the ratio of reserves for loan losses to nonperforming assets. The ratio of deposits to funding accounted for 15 percent of the score. And the efficiency ratio, which compares costs with revenues, received a 5 percent weighting.
Banks were ranked on each criterion, and the ranking positions were weighted and combined to determine the banks’ overall scores. Lenders that reported a loss in net income were excluded. All data are for the banks’ latest fiscal year, which in most cases ended on Dec. 31, 2014. (Norinchukin Bank and a few Indian banks have a March-ending fiscal year; their ranking was based on data for the year ended on March 31, 2014.) Only banks that provided Bloomberg with data in all five categories were considered. In total, 114 banks were ranked; 13 of them are private.
With assistance from Laurie Meisler, William Mellor, Elizabeth Dexheimer, Matthew Martin, Chanyaporn Chanjaroen, Shingo Kawamoto, Finbarr Flynn, and Niklas Magnusson.