Bank Rankings and Ranking Parameters - Essay Example

Bank Rankings and Ranking Parameters Student’s Name Institutional Affiliation Course name Date of Submission Bank Rankings and Ranking Parameters Introduction Banks play a critical role in the development of an economy. The past few years have seen a huge growth in the number of banks in most countries across the globe. The growth in banks is expected to continue in the future due to the growth of economies of most countries. However, the performance of Chinese banks has taken the banking industry by surprising in the recent bank rankings conducted by The Banker (2015). According to the rankings, it emerged that most big banks have lost ground to the Chinese banks. Before the 2007/2008 financial meltdown, HSBC topped the list as the best performing bank in the world (Farthing 2015). It was followed by Citigroup and RBS bank in second and third position respectively. However, these major banks slipped in the recent bank rankings by losing ground to Chinese banks that made significant improvement in terms of performance. According the Banker’s recent ranking of banks, HSBC slipped from the fifth place that it held in 2014 ranking to position nine (The Banker 2015). Citigroup bank slipped one place from sixth to seventh position as the Scottish Royal Bank slipped to 18th position. As these major banks were losing their position, the Chinese banks were making huge gains in the banking industry. According to the 2015 ranking, there were three Chinese banks in top five, including the Bank of China that moved to fourth place from the seventh place; China Construction Bank at position two and Agricultural Bank of China at position six. The rankings of banks were done using a variety of parameters to compare the relative performance of big banks in the world. This paper is divided into two parts, with the first part focusing on the different parameters used to compare the relative performance of big banks and discuss the information conveyed by the parameters. The second part of the paper will compare the performance of Australian banks with other major world rivals on different parameters. Parameters used for Comparing Banks Performances The performance of banks is compared using a variety of parameters that are used to arrive at the best performing bank to the worst performing. In fact, in arriving at the ranking, The Banker used a number of performance measurement parameters as highlighted hereunder. Deposit Growth The growth in customer deposit is one of the parameters that are commonly used to measure the performance of banks. In this respect, when a bank experiences a high growth in customer deposits, this is taken to mean high interest on deposits (Baker and Filbeck 2015, p. 23). Similarly, the growth in customer deposit is also taken to mean that the bank is experiencing increased customer loyalty. Therefore, when comparing how banks have performed in a year, bank analyses, such as The Banker usually look at the customer deposit growth rate recorded to see, which one has recorded the highest deposit growth rate vis-à-vis that which has reported the lowest customer deposited growth (The Banker 2015). Accordingly, based on the deposit growth rates, the bank with the highest customer deposit growth rate is ranked higher in terms of performance compared to the rest. Operating profit Operating profit is another parameter that is commonly used to compare the performance of banks. Operating profit is that part of business earnings that is derived from the core business operations (Baker and Filbeck 2015, p. 25). Operating profits also does not include any profits earned from investment and is exclusive of taxes and interests; otherwise known as earnings before interest and taxes. Using this parameter, analysts use operating profit reported by major companies in a financial year to determine the operating efficiency of each firm. Accordingly, the bank with the highest operating profit is ranked higher in terms of operational efficiency while the bank with the lowest operating profits is rank low in that order. For instance, according to The Banker (2015) rankings based on operating profits, the major Chinese banks, such as the Bank of China, China Construction Bank and Agricultural Bank of China performed better than other biggest banks in the world. As such, the good ranking of the Chinese banks by The Banker (2015) is partly attributed to the fact that they posted high operating profits than other major banks in the world. Net Interest Income The performance of banks is also compared using the net interest income reported by companies in a financial year. Net interest income is arrived at by subtracting the total expenses incurred by a company from the revenue generated by a firm from its assets. The excess revenue that a bank generates from the spread between interest earned on assets and interest paid on deposits is what gives net interest income (Baker and Filbeck 2015, p. 29). Accordingly, when comparing the performance of banks on this parameter, a bank that report the highest net interest income is ranked higher than those that report low net interest income. This is because high net interest income signifies high profitability of a bank. Capital adequacy Ratio Capital adequacy ratio is another parameter that is used in the banking industry to compare the performance of various banks. The ratio measures the capital strength of a bank at any given time. Capital adequacy ratio of a bank is determined by dividing the capital by the risk (Sheridan and Jang 2012, p. 53). The ratio is important in measuring the performance of a firm since it indicates the ability of a bank to protect its depositor. The two types of capital measured here include tier one that indicates the ability of a bank to absorb losses without the bank necessarily being forced into liquidation during hard times. The second capital is the tier two that indicates the ability of a bank to absorb losses when a company is ceasing operation, therefore, providing less protection to depositors (Sheridan and Jang 2012, p. 59). Basically, a bank with the highest capital adequacy ratio means high capital strength, thus ranks higher than those with low ratio in terms of performance. For instance, before the 2007/2008 financial crisis, HSBC, Citigroup and the Scottish Royal Bank ranks first, second and third respectively in terms of capital strength. Total Assets The performance of banks is also compared using the total assets held by a bank. The assets of a bank are the total deposits and investments of a bank. In other words, assets are the claims that a bank has that support its operations (Sheridan and Jang 2012, p. 64). Normally, a bank with the highest value of total assets is ranked higher in terms of performance than those with few assets at their disposals. Market Capitalization Market capitalization is the other parameter commonly used in comparing the performance of banks. Market capitalization represents the total market value of the outstanding shares of a firm. The market capitalization of a firm is determined by multiplying the outstanding shares of a firm by the market price of per share (Baker and Filbeck 2015, p. 33). Banks with high value of market capitalization are ranked higher than those with low value of market capitalization. Comparison of the Performance of Australian Banks with Major World Rivals on the Above Parameters Total Assets Total assets are one of the parameters commonly used to compare the performances of banks. According to 2014 financial report, Australia’s NAB ranked the highest in terms of total asset size after closing the year with a total assets valued at $883,301 million (Airiodion 2015). It was followed closely by the Commonwealth Bank that closed the 2014 financial year with a total asset worth $791,451 million. ANZ came third with total assets worth $ 772,092 million while Westpac closed the year with assets worth $770,842 million (Mason 2014). Comparatively, the Australian major banks performed below most rival banks in the world in terms of asset size. In the same year, The Industrial & Commercial Bank of China (ICBC) closed the year with total assets worth $3,451.74 billion, China Construction Bank Corporation $2819.24 billion, Agricultural Bank of China $ 2716.10 billion, HSBC Holdings $ 2670.00 and JPMorgan Chase & Co. $ 2,600.00 billion. The fact that most of Australian major rival banks performed better than Australian major banks in terms of asset size means that the Australian banks need to do a lot if they are to compete favorably with their major rivals in the world. In fact, worldwide, not even a single Australian bank featured in the top 20 best performing banks measured by total asset size. Net Interest Income In term of net interest income, it also become apparent that Australian major banks performed dismally compared to their foreign rivals. According to the 2014 financial report, the Commonwealth Bank closed the year with a net interest income of $15,101 million while NAB posted a net interest income of 13,739 million (Airiodion 2015). ANZ, however, registered a net interest income of 13,810 million while Westpac closed the year with a net interest income of $13,542 million. These performances were lower compare to the world’s major banks. For instance, in the same year, ICBC posted a net interest income of $66,427 million while China Construction Bank registered a net interest income of $ 56, 153 million as s Agricultural Bank of China posted a net interest income of $54,353 million (Liyao 2013). Capital Adequacy Ratio In terms of tier one capital, again Australian banks performed dismally compared to their major foreign rivals. According to The Banker (2015) ranking in terms of tier one capital, ICBC bank lead with a capital of $248,608 million followed by China Construction Bank at $202,119 million, with JP Morgan coming third at 186,632 million. Bank of China came forth with $184231 million while Bank of America closed the top five best performing banks in terms of tier one capital with $168,973. In fact, none of the Australian banks featured in top 10 best performing banks in terms of tier one capital. Market Capitalization Market capitalization as indicated earlier is also another parameter widely used in measuring the performance of banks. Again, it emerges from the 2015 ranking that Australian banks’ performance are below most of their major competitors in the world in terms of market capitalization. According to Relbanks 2015 ranking by market capitalization, ICBC emerged top with a market capitalization of $302 billion followed by Wells Fargo & Co. that has a market capitalization of $281 billion. JP Morgan Chase & Co. came fourth with a market capitalization of $ 230.60 billion as China Construction Bank closed the top five best performing banks in terms of market capitalization as it had a market capitalization of $ 208.04 billion (Mason 2014). The first Australian bank was the Commonwealth Bank of Australia that came at position ten with a market capitalization of $114.75 billion (Airiodion 2015). It was followed by Westpac at position thirteen with a market capitalization of $91.39 billion while the last Australian bank at top 20 was the Australia and New Zealand Banking (ANZ) that ranked at position 19. This statistics clearly shows that Australian banks are not competing favorably with the biggest foreign banks, such as the Chinese and American banks. Operating Income According to the 2014 financial reports, it becomes clear that Australian banks posted low operating profit compared to their major foreign rivals. For instance, NAB posted an operating profit of $7955 million while the Commonwealth Bank posted a net operating income of $22,488 million (Airiodion 2015). ANZ Group, however, posted a net operating income of $20,054 million as Westpac posted an operating income of $10,740 million. Although these were the best performing banks in Australia, their major foreign rivals posted higher operating profits for the period. For instance, during the 2014 financial year, the China Construction Bank posted an operating income of $125,398 million, which is far higher than the profits made by the top four Australian banks combined. Agricultural Bank of China and Bank of China also posted higher profits than the Australian banks. During 2014 financial year, Agricultural Bank of China and Bank of China posted operating incomes of $ 115,392 million and 105,623 million respectively (Mason 2014). The top American banks, such as Wells Fargo & Co. and Bank of America also posted better operating income than Australian banks. Deposit Growth In terms of deposit growth, the Chinese banks performed better than Australian banks. The same could also be seen with American top banks that recorded higher deposit growth than Australian banks (The Banker 2015). Conclusion The banking industry has become more competitive than ever before. The Chinese banks, in particular are currently performing much better than most major banks in the world. This was clearly revealed by The Banker’s 2015 ranking that showed that Chinese banks are dislodging the biggest banks in the world to take top spot. The rankings, however, are done using a number of parameters, including deposit growth, operating income, net interest income, asset size, market capitalization, and capital adequacy ratio among others. However, from analysis, it become apparent that Australian banks are performing dismally compared to their foreign rivals when compared on all the parameters. References Airiodion, O 2015, Best banks in Australia (Ranking: Biggest banks, best savings accounts). 29 July, viewed 14 September 2015 http://www.advisoryhq.com/articles/best-banks-in-australia/ Baker, H. K., & Filbeck, G 2015, Investment risk management. Oxford University Press, London. Farthing, T 2015, The Banker top 1000 world banks 2015 ranking world press: Immediate release. The Banker 29 June, viewed 14 June 2015 http://www.thebanker.com/Top-1000-World-Banks/The-Banker-Top-1000-World-Banks-2015-ranking-WORLD-Press-IMMEDIATE-RELEASE Liyao, L 2013, Top 20 world banks by net interest income 2013, viewed 14 September 2015 http://www.china.org.cn/top10/2013-07/17/content_29449946.htm Mason, M 2014, Australia's big 4 banks are global unknowns. The Sydney Morning Herald 3 February, viewed 14 September 2015 http://www.smh.com.au/business/banking-and-finance/australias-big-4-banks-are-global-unknowns-20140203-31win.html Sheridan, N., & Jang, B 2012, Bank capital adequacy in Australia. International Monetary Fund, Sydney. The Banker 2015, Summary of the Top 1000 world banks, viewed 14 September 2015 http://www.thebanker.com/Top-1000-World-Banks/%28offset%29/40 Read More