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Bosnia-Herzegovina Commercial Banking Report Q4 2009Published by: Business Monitor International Published: Aug. 7, 2009 - 45 Pages Table of Contents
AbstractWe now rate 59 banking systems, and it is little surprise that the developed states dominate the top spots.The US and UK come first and second place, respectively, with scores of 88.7 and 88.0 out of 100. Ofcrucial importance to both scores are the very high rankings in the crucial 'Risks to realisation of returns -Market structure' sub-category, which accounts for 42% of the overall score. The two countries areranked first and second in this category as well. This sub-category captures the size of the sector, and thepotential for assets and loans to grow in US dollar terms. While both systems have been buffeted by theglobal credit crunch and will not post stellar growth numbers in percentage terms for the foreseeablefuture, the sheer size of the US and UK's financial systems means that there is massive potential fordeposits, assets and client loans to rise. In addition, the generally solid institutional framework - whichlooks set to be augmented with new post-credit crunch regulations - will continue to provide a firm basisfor the sector.A Mixed Bag For The Developed States Following just behind the US and UK are a clutch of major developed state economies, including France(82.9, 3rd) and Germany (80.5, 4th), Canada (79.9, 5th), as well as Australia and Italy (78.4, joint 6th). All of these sectors have reasonable prospects into the medium term, having a large deposit and loan base,as well as the potential to grow substantially in volume (if not percentage) terms. However, several statesare notable by their absence in this cluster. Austria falls somewhat short (72.4, 12th) of the pack, alongwith Greece (69.4, 16th), but it is the poor performances by Switzerland (62.7, 26th) and Japan (56.3,34th) which really stand out. Both countries are going to struggle to post increases in asset or loan growthin US dollar terms over the forecast period, to 2013, partially as a result of currency moves to thedownside, but also, in the case of Switzerland, because of the relative weakness of the two key bankinggroups, UBS and Credit Suisse, which had built up large franchises during the good years. Asia Rising Significantly, just behind the main pack of European economies, several Asian states have managed topost strong performances in our risk ratings. Malaysia (72.1, 11th) and Singapore (77.1, 8th) come inahead of Austria. However, Singapore leads the world globally in the 'Risks to realisation of returns -Country risk' sub-category, with a score of 84.0, while South Korea has a score of 64.0. Singapore's highscore rests on good scores for key elements of BMI's economic, political and business environment riskratings, which measure the risks to policy continuity. In contrast, the small size of the economy andbanking sector is a major factor limiting the potential for expansion, especially in a world of lowerliquidity and risk appetite. South Korea, however, has a large domestic economy to provide the depositbase necessary to fund credit growth. Elsewhere in Asia, we note that China (overall score 75.1) ranks 9th overall. As the world's third biggesteconomy - and still an emerging one at that - it is little surprise that the scope for asset growth in China ishuge. This has allowed the country to be ranked fourth in the 'Limits of potential returns' category (74.0),and post the highest 'Limits of potential returns - Market structure' sub-category score with 90.0. Whatprevents China from rising any higher is its poor performances in the 'Limits of potential returns -Country structure' sub-category, 57.5 (42nd), and the 'Risk to realisation of returns category', 80.0 (9th). Of particular concern to BMI is the potential for a collapse of the local system, because much lending isstill state directed and risk management is still embryonic. In addition, despite the size of the wholeeconomy, per capita GDP remains low. We forecast it at US$3,024 for 2009, with significant incomeinequalities. This severely limits the ability of financial institutions to sell premium products in localmarkets, and also means that average deposit levels are still very low. Central And Eastern Europe, Limited Opportunities The emerging European states are posting surprisingly mediocre ratings outturns. We highlight thepotential for a systemic crisis in the region as the major Western European banks remove credit andcapital from Central and Eastern Europe (CEE). These risks are exacerbated by the deep recessions wesee in the Baltic states, Bulgaria, Russia and Turkey, and the risk of further currency crises that couldcreate even greater economic dislocations, as the massive economic asymmetries that have built up in theregion unwind. When taken in tandem with the relatively small size of the local economies and the rapidbanking sector expansion seen in recent years, it is little surprise that the highest rated CEE state isregional heavyweight Russia, with 73.8 (10th globally), and that the top 'new' EU member is the CzechRepublic, 64.5 (24th). Coming close to the bottom of both the regional and global peers groups are Latvia(39.0, 55th) and Ukraine (43.0, 51st), which have both been forced to tap the IMF and EU for emergencyfunds. MENA Below Par The big story in recent years in the Middle East and North Africa (MENA) banking sector has been highoil prices. Hydrocarbon revenues have swollen bank balances across the Gulf region, with significantamounts of capital and liquidity finding its way to North Africa as well. With the days of stellar oil pricesgone for now (and not likely to return over the forecast period) the outlook is not so positive for theregion, and this is reflected in the fact that the two highest ranked countries are the UAE at 14th andSaudi Arabia at 21st. No other MENA state has broken into the top 25 of our 59-strong ratings universe. Of particular concern is that while some progress has been made on putting the region's financialinfrastructure on a more sustainable footing in recent years, it is still far too dependant upon oil revenues,and there are few drivers of economic or commercial banking growth outside the natural resources sector. It is particularly worrying that not one MENA state has broken into the top 10 states in the 'Limits ofpotential returns - Market structure' sub-category. The best performer is the UAE, in 18th place and evenwith the growth of Islamic banking products, the boom years are over. We expect much more moderategrowth in the financial space over the forecast period. Opportunities In Africa While Africa remains one of the most 'under-banked' regions in the world - and hence one of the mostinsulated from the global credit crunch - the commercial banking business environment ratings still reflectthe major problems in operating even in the region's largest economies. South Africa's overall 70.5 ratingscore put it in 13th place globally, while in the 'Limits of potential returns - Market structure' category itscores 73.3, but it receives poor score for 'Risks to realisation of returns - Country risk' with 56.0. Thecountry's main weaknesses, in common with Kenya and Nigeria, are bureaucracy, external economic riskand financial market risk, all of which deter potential investors from engaging more fully in the localmarket. Diverse Latin Performance Again, in Latin America, the ratings do not tell one particular story, with a diverse regional picturedeveloping. Perhaps the most interesting story is among the worst performers, which include Argentina(43.0, 49th), Colombia (50.3, 43rd) and Venezuela (36.0, 56th). All three economies face difficult timesover the coming years, having been fiscally imprudent. The latter two, especially Venezuela, havebenefited significantly from the oil boom, which has now come to an end. There is little to be optimisticabout in any part of the ratings for these countries, and we anticipate a much weaker performance than inBrazil (66.5, 23rd), Chile (66.6, 22nd) or even Mexico (67.6, 20th). Of particular note is Brazil's crucial'Limits of potential returns - Market structure' sub-category rating of 80.0 (seventh globally) and Chile'sreasonably solid 80.0 'Risks to realisation of returns - Market structure' rank of 11th. Commercial Banking Business Environment Rating Methodology Since Q108, we have described numerically the banking business environment for each of the countriessurveyed by BMI. We do this through our Commercial Banking Business Environment Rating (CBBER),a measure that ensures we capture the latest quantitative information available. It also ensures consistencyacross all countries and between the inputs to the CBBER and the Insurance Business EnvironmentRating, which is likewise now a feature of our insurance reports. Like the Business Environment Ratingscalculated by BMI for all the other industries on which it reports, the CBBER takes into account thelimits of potential returns and the risks to the realisation of those returns. It is weighted 70% to the formerand 30% to the latter. The evaluation of the 'Limits of potential returns' includes market elements that are specific to thebanking industry of the country in question and elements that relate to that country in general. Within the70% of the CBBER that takes into account the 'Limits of potential returns', the market elements have a60% weighting and the country elements have a 40% weighting. The evaluation of the 'Risks torealisation of returns' also includes banking elements and country elements (specifically, BMI'sassessment of long-term country risk). However, within the 30% of the CBBER that take into account therisks, these elements are weighted 40% and 60%, respectively. Further details on how we calculate the CBBER are provided at the end of this report. In general, though,three aspects need to be borne in mind in interpreting the CBBERs. The first is that the market elementsof the 'Limits of potential returns' are by far the most heavily weighted of the four elements. They accountfor 60% of 70% (or 42%) of the overall CBBER. Second, if the market elements are significantly higherthan the country elements of the 'Limits of potential returns', it usually implies that the banking sector is(very) large and/or developed relative to the general wealth, stability and financial infrastructure in thecountry. Conversely, if the market elements are significantly lower than the country elements, it usuallymeans that the banking sector is small and/or underdeveloped relative to the general wealth, stability andfinancial infrastructure in the country. Third, within the 'Risks to the realisation of returns' category, themarket elements (ie: how regulations affect the development of the sector, how regulations affectcompetition within it, and Moody's Investor Services ratings for local currency deposits) can be markedlydifferent from BMI's long-term risk rating. Get Full Details About This Report >> |
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