A wide range of criteria were considered including financial performance, strategy, quality of management and transparency as well as overall vision.
EMERGING
EUROPE
GARANTI Bank
Ergun Ozen, CEO
Garanti Bank is a classic example of how a well-run emerging market bank can shrug off the global economic downturn.
In August, Turkey’s third-biggest lender by market value, reported second-quarter net profit of TL765 million lira, up 41% year-on-year. The bulk of this was made relatively easily: Garanti had snapped up high-yielding government paper before the central bank cut interest rates.
As a result, net interest-related income rose 56% in the second-quarter of 2009 from the previous year – with the bulk coming from Treasury paper.
But this does not tell the full balance sheet story. A unique mix of strong risk management combined with timely aggression over the past year has reinforced Garanti’s market-leading status. Garanti has the lowest number of non-performing loans, the strongest loan growth and the highest return on equity in its peer group of private Turkish banks.
This year, Garanti used profits generated from trading gains to boost its loan book. While many banks have been consumed by fears of an abrupt economic slowdown and an IMF bailout, “Garanti was bullish, and this strategy paid off,” says Hakan Aygun, banking analyst at AK Investment in Istanbul.
In the first half of the year, lira-denominated loans grew by 4% while loans from its competitor AkBank contracted by 6.5%. Thanks to this credit growth, the low interest rate environment and trading gains, Garanti will post a return on equity of 27% this year, reckons Aygun. This compares with the sector average of around 24%.
Tolga Egemen, head of financial institutions and corporate banking at Garanti, tells Emerging Markets that it is structurally stronger than its peers, and that is why it can suck in high fees and commissions for its commercial and investment-banking services. He says its strong reputation has generated goodwill from customers and will serve to ensure the sustainability of profits generated from trade finance and cash management across the business cycle.
Egemen says Garanti traditionally “makes the bulk of its income from customer-related activities rather than Treasury and trading-related profits”. Nevertheless, there is no standard breakdown of business streams among Turkish banks, so a comparison is difficult to make.
Garanti has continued to expand its balance sheet by 5% this year. It has a 14% market share of the mortgage market, and its credit card loan portfolio represents a 14% market share.
Garanti has a unique remuneration scheme compared with its peers, with around 60% of mid-level and top-level managers’ pay coming from performance-related targets. This has bred innovation and efficiency, says Aygun.
Over the past three years, Garanti has also innovated new norms in risk management in Turkey. It has created special credit committees and separate client groups to classify and monitor the quality of borrowers across business streams. These initiatives have allowed Garanti to keep non-performing loans at just 3.3% of its lending compared with the 4.6% sector average.
Egemen laments the government’s reluctance to formalize a new funding programme with the IMF. “The IMF is a good umbrella to have, even when the weather is good, so you are prepared for the bad times,” he says. —Sid Verma
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ASIA
ICBC
Jian Jianqing, Chairman
The world’s biggest bank, and one of the fastest growing, ICBC is an obvious winner of this year’s banking achievement award.
ICBC (Industrial & Commercial Bank of China) overtook Citi to become the world’s biggest bank by market capitalization in July 2007, just nine months after becoming a listed company. That marked only the beginning of Citi’s problems, but ICBC’s fortunes have continued to improve, and it surged past JP Morgan in April this year to become the world’s biggest bank by deposits.
Chairman Jiang Jianqing professed his desire in June for ICBC to become “the world’s most profitable, pre-eminent and respected bank”, before posting staggering results for the first half.
“China posted more loan growth in the first half of 2009 than it did in all of 2008 as the government turned on the lending taps in staggering fashion,” says Alistair Scarff, head of Asia Pacific financial institutions research at Bank of America Merrill Lynch.
“ICBC’s net interest-income growth is attractive, and fee income is benefiting from the development of new banking products and services for retail and corporate customers, and a structural shift in the evolution of China’s financial markets.” Revenues at China’s banks depend heavily on government-regulated lending and deposit rates, and interest margins have taken a knock as the central bank has lowered rates. But ICBC reported investment banking fees in the first half of 2009 that were up more than 120% on the previous six months, a sign of the growing importance of China’s domestic capital markets.
ICBC’s size brings with it risks of poor discipline, especially in branches thousands of miles away from its Beijing headquarters, but bad debt ratios are falling. Just 1.81% of loans were non-performing in the second quarter of 2009, according to ICBC’s results, with a balance of Rmb98.7 billion as of June 30.
The government’s fiscal stimulus has prompted record loan growth across China’s banking sector. ICBC’s loans and advances totalled Rmb5.44 trillion ($796 billion) for the first half of the year, an increase of 19% from the end of 2008, and the rapid expansion of its loan book has inevitably raised questions over credit quality. Fears persist that China’s banks are merely ‘evergreening’ loans, dishing out more money to troubled clients to help them meet interest payments on their existing debt in a tactic that defers the need to record any immediate rise in bad debts.
Any stall in China’s economic recovery will put pressure on its banking system, but analysts remain confident that ICBC can dodge the threat of non-performing loans in years to come. “ICBC’s not afraid of a low loan to deposit ratio. It’s been very cautious and maintained a low pace of loan growth in the first half of 2009 relative to its peers,” says Nick Lord at Macquarie, who has an outperform rating on the bank’s Hong Kong-listed ‘H’ shares.
Here, size matters. ICBC’s total loan book comes to only 58% of its deposit base, below the sector average in China and at a far more conservative loan to deposit ratio than its global peers.
Earnings potential, too, looks good, as the make-up of new loans shifts from short-term trade financing to longer-term lending. China’s rebounding economy is fuelling private-sector demand for funding, which allows banks to charge real spreads for longer-term loans. —Steve Garton
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MIDDLE
EAST
NATIONAL BANK OF KUWAIT
Ibrahim Dabdoub,
CEO
The Middle East’s banking sector initially watched with a certain smugness as the West’s banking sector fell apart in 2007 and 2008. There were occasional comments along the lines of ‘if the West only followed Shariah banking principles, none of this would have happened’.
But in the second half of 2008, the global financial hurricane engulfed the Middle East as well, claiming victims in Dubai, Saudi Arabia, Kuwait, and even in Islamic banking. Only Lebanon seemed to be immune to the crisis, and indeed profits in its banking sector continue to boom.
But National Bank of Kuwait stands out in a different way – for its skill in steering its way through a difficult domestic environment while also continuing its strategy of prudent regional expansion.
Considering the extent to which NBK dominates Kuwait’s banking sector – where it has 30% of the sector’s assets – and the extent to which Kuwaiti banking has been hit by the credit crunch, it is no small feat that NBK has continued to be profitable and has continued to meet its financial obligations on time.
Moreover it has not needed any state assistance – in contrast to other local players such as Gulf Bank, Global Investment House, and Investment Dar.
“It’s true that NBK’s profit fell by 7% in 2008, and that it has continued to fall this year, but that compares favourably to an average fall in profits of 93% for the sector in 2008,” says Manal Hami Sabbah, investment analyst at Coast Brokerage in Riyadh.
The bank’s financial strength rating was downgraded by Moody’s in late August, but its long-term ratings are still the highest of any Middle Eastern bank, with an Aa2 rating from Moody’s and an A+ rating from Standard & Poor’s. It has a capital ratio of 15.3%, and a non-performing loan level of just 2%.
Moreover, it has shown a laudable loyalty and responsibility towards its clients during the crisis. For example, clients of its asset management arm, NBK Capital, were hit by the $50 billion Madoff fraud earlier this year, as were several other Middle Eastern asset managers.
NBK was the first bank to come out and say it would recompense investors fully for any losses.
Its regional expansion continues, but at a measured pace. In the past 12 months, it has increased its stake in Islamic bank Boubyan Bank to 40%, increased its stake in International Bank of Qatar, and opened its first branch in Dubai.
Its existing subsidiaries are doing well – Credit Bank of Iraq has a strong position in that country’s fast growing trade finance market; NBK Bahrain’s profits were up 40% in the first half of the year; and Al Watany Bank, the small Egyptian bank it acquired in 2007, is growing well and is well placed to take advantage of the excellent conditions in Egyptian banking (where the central bank has now stopped giving licences to foreign banks). —Julian Evans
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AFRICA
EcoBANK
Arnold Ekpe, CEO
Ecobank has rewritten the rule book when it comes to African banking. It has been a leader in regional expansion, and this year it opened branches in Uganda and Zambia, bringing the total number of countries where it operates to 29. It now plans to open offices in Tanzania, Sudan and the Democratic Republic of Congo. Some rivals are perhaps more dominant in either Anglophone or Francophone Africa, but none have such a presence in both sides of the continent.
Under CEO Arnold Ekpe, a former Citigroup banker, it has also rewritten the type of banking that it offers. It has an extensive branch network, with over 600 across the continent. But it also pioneered the use of kiosks and booths to roll out its banking services to the man and woman in the street, and draw them into the banking system. It has also pushed new technologies in African banking, such as the multi-currency ATM card, which it introduced in Nigeria last year.
Andrew Gordon, partner at Scipion Capital, an Africa-dedicated fund, says: “[Ekpe] and Ecobank have a good name in the market. The bank has stronger and deeper facilities than many of the local banks working in Africa.”
Its lending capability was highlighted in September, when it announced a $300 million facility for the Tema oil refinery in Ghana, where Ecobank has also previously arranged the country’s first sovereign bond in 2007, and the $900 million sale of Ghana Telecom to Vodafone in July 2008.
Ecobank has grown rapidly since it was set up in 1988. Its assets have grown from $1.9 billion in 2004 to $8.3 billion in 2008, and deposits have grown from $1.4 billion in 2004 to $5.8 billion in 2008. Its rate of expansion over the last two years has eaten into net profit, however: it was down in 2008 versus 2007, because of high costs, and only grew 1% in the first half of 2009.
In August 2008, the bank launched an ambitious rights offer on the three stock exchanges where it is listed – Ghana, Nigeria and the BRVM of West Africa. It hoped to raise $2.5 billion, making it by far the largest sub-Saharan equity offer. The onset of the credit crunch did for that plan, and the bank only managed to raise $550 million, but every little helps in an environment where many banks are being nationalized for being under-capitalized.
The new equity may come in handy in Nigeria, where Ecobank is one of the 11 banks whose operations are being reviewed by fearsome new bank governor Sanusi Lamido Sanusi. Ecobank Nigeria is battling to recover some of its bad loans, and recently took one large corporate customer – Global Infrastructure Nigeria – to court for defaulting on an N5 billion loan it made for a mining concession. —Julian Evans
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Latin
America
ITAU UNIBANCO
Roberto Setubal, CEO
Itau and Unibanco have been household names in Brazil since they were launched between the First and Second World Wars. Globalization winds later pushed them closer together.
Last year, during a discreet meeting in Sao Paulo, details of the merger were arranged between Roberto Setubal, the president of Itau who was to become chief executive of Itau Unibanco, and Pedro Moreira Salles, now chairman of the new bank.
A few weeks later, Itau Unibanco obtained approval from the Brazilian central bank and pledged to emerge as the largest financial conglomerate of the southern hemisphere.
With assets worth R$596 billion in mid 2009, Itau Unibanco also had the strongest market capitalization among Latin American banks. It registered the highest net earnings at R$4.6 billion during the first half of the year. It was down 17.8% compared to the same period in 2008 as a result of greater provisions, but still better than the 24% decline in overall banking profits in Brazil in the first half of the year.
“It was a great timing,” Setubal tells Emerging Markets. “When we announced the deal in November, the [financial] crisis already had a strong impact on Brazil. Markets then experienced slow growth in the past 10 months. If we had done that when the market was very active, we would have had a harder time to attend to market demands and the goals of the merger at the same time.”
The pace of integration, which is due to be completed next year, has been surprisingly swift. “Integration in some areas has already been completed, such as investment banking. Treasury, insurance and credit cards have made a lot of progress,” says Setubal. Other areas, like retail and small business banking are more time consuming. “This should go until the end of 2010.”
Luis Miguel Santacreu, a bank analyst at Austin Ratings, a Brazilian credit rating agency, says integration was the best achievement. “The merger will mean more benefits than problems. There are costs involved, and there was also the impact of the crisis in the first half of the year, but the benefits of integration in terms of earnings will come in the long run,” he says.
Setubal has also made it clear that Itau Unibanco will seek to expand internationally. It is already operating in Argentina and a few other Latin American countries, but it is aiming higher. “International expansion is within our reach,” he says.
In August, the bank appointed a new international advisory board, chaired by the former Brazilian finance minister and former Unibanco chairman Pedro Malan to help the bank boost its international profile. Carlos Ghosn, chief executive of Renault Nissan, Jacob Frenkel, former governor of the Bank of Israel, and Raghuram Rajan, former IMF chief economist, feature among the 10-member board, which is due to meet for the first time in London in October. —Thierry Ogier