ICBC Deposes Citigroup as Chinese Banks Rule in New World Order

There's a new world order for banks, and the Chinese, for the first time, are the biggest, with a market capitalization that has made perennial No. 1 Citigroup Inc. a distant also-ran behind Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd.

``The tables have been completely turned,'' said Daniel Yergin, the Washington, D.C.-based chairman of Cambridge Energy Research Associates Inc. during an interview at the World Economic Forum in Davos, Switzerland.

The reversal of fortunes is the clearest sign yet that shareholders are betting on banks in the emerging markets rather than the U.S. institutions that dominated the financial landscape for most of the past century. As recently as 2003, there were 13 American banks ranked in the top 20 and not a single Asian rival, data compiled by Bloomberg show. Now, there are four Asian and six U.S. institutions. The collapse of the subprime mortgage market wiped out almost $100 billion of value from the three biggest U.S. banks in the past six months.

It was just a year ago that Citigroup was the world's biggest bank by market value, and ICBC was beginning its fourth month as a publicly traded company.

Today, Beijing-based ICBC is the largest financial-services firm and Citigroup has tumbled to seventh on growing concern that the 196-year-old company is no match for a bank based in the world's fastest-growing major economy that has more customers than the combined populations of France, Spain and the U.K.

``As far as the financial industry is concerned, in August you went from one world to another almost overnight, especially in the U.S.,'' said Yergin, whose book ``The Prize: The Epic Quest for Oil, Money & Power'' won the Pulitzer Prize in 1992.

New Champions

Citigroup, Zurich-based UBS AG and Royal Bank of Scotland Group Plc in Edinburgh, names that headed the list of largest companies five years ago, are today's laggards.

The new champions are ICBC and Beijing-based China Construction Bank, as well as Bank of America Corp. in Charlotte, North Carolina, and London-based HSBC Holdings Plc, two companies criticized by shareholders for relying on consumer banking networks rather than securities units that propelled profits at competitors until the second half of last year.

Investors have piled into Chinese banks to participate in an economy that expanded 11.4 percent in 2007, the fastest in 13 years. ICBC, China Construction Bank and Bank of China, the country's three biggest, are valued at $608 billion, compared with $496 billion for Bank of America, JPMorgan Chase & Co. and Citigroup. ICBC is worth about 1.99 trillion yuan ($277 billion), $82 billion more than Bank of America, its closest rival.

Housing Recession

At the same time, the biggest western banks are enduring the worst U.S. housing market in a quarter century, which has led to more than $145 billion of subprime mortgage-related losses and investment markdowns and sparked concern about a possible U.S. recession. The value of American banks has been further dented by declines in the dollar during five of the past six years.

``There's the rise of China, challenges faced by multibusiness banks and the subprime shock,'' said Charles Whitehead, associate professor of corporate law at Boston University, in an interview. ``These trends changed the banking landscape.''

Citigroup, the world's biggest bank since the merger of Citicorp and Travelers Group Inc. in 1998, slumped 47 percent in New York trading in the past year, losing the top spot. In the fourth quarter, the New York-based company replaced Chief Executive Officer Charles Prince, posted a record loss and wrote down $18 billion.

`Key Components'

Market value shows where investors see future growth, said Christopher Sur, a Frankfurt-based senior manager in the financial services unit at PricewaterhouseCoopers LLP, the biggest accounting firm.

``Key components like return on equity and cost-income ratios are all reflected in the share price,'' he said.

Bank of America has retained its second-place spot worldwide by market value since 2005; HSBC held on to third place ahead of China Construction Bank; and San Francisco-based Wells Fargo & Co., the biggest bank on the U.S. West Coast, rose to eighth from 11th last year. All three companies rely on retail business such as deposits, loans and fees for about two thirds of revenue, according to Bloomberg data on 2006 figures.

By contrast, Citigroup generated a little more than half of its revenue from global consumers and about a third of revenue from investment banking-related operations including complex securities such as collateralized debt obligations, Bloomberg data show.

`Relearn the Basics'

``Citigroup doesn't have the broad consumer business and deposit base to fall back on,'' in the U.S. like Bank of America, JPMorgan and Wells Fargo, said Graham Tanaka, president of New York-based Tanaka Capital Management Inc., which sold its Citigroup shares about a month ago. ``Periodically we go through cycles where banks have to relearn the basics.''

UBS, the biggest European bank by assets, declined to 16th place from eighth after posting the biggest ever loss by a bank in the fourth quarter. Morgan Stanley and Barclays Plc fell out of the top 20, and Washington-based Fannie Mae, the largest U.S. mortgage finance company, and Freddie Mac of McLean, Virginia, sunk furthest. Goldman Sachs Group Inc. is the highest-ranking securities firm, and places 15th in the world among financial- services companies.

Italy's two-biggest banks, UniCredit SpA and Intesa Sanpaolo SpA, have climbed to 12th and 13th, respectively, after almost quadrupling their market value in the last three years through acquisitions at home and in central and eastern Europe. Both companies weren't even in the top 20 three years ago. They dwarf Frankfurt-based Deutsche Bank AG, the world's 27th biggest bank despite its being the No. 1 financial company in the third- biggest economy.

Regionals Outpace Universals

Deutsche Bank and Credit Suisse Group, Switzerland's second- biggest bank, are both smaller than China's Bank of Communications Ltd., the Asian country's fourth-largest bank by market value. ABN Amro Holding NV, the Dutch bank, which climbed to 11th this year, will lose that spot as it is broken apart by a group led by RBS, which bought it for 72 billion euros ($107 billion) in October in the industry's biggest-yet acquisition.

``If you take out the Chinese, the main disturbance in the rankings is between large universal banks and regional-oriented banks,'' said Roy Smith, a finance professor at New York University's Stern School of Business and a former partner at Goldman. ``The universal banks have been harder hit by subprime.''

Share price declines, writedowns and rising borrowing costs forced firms, including Citigroup and UBS, to raise at least $84 billion, mostly from investors in the Middle East and Asia, to shore up balance sheets.

Sovereign Funds

``The dominant economic theme is how deep are the problems and the crisis in the financial system, and what's the impact of the appearance on the world stage of the sovereign wealth funds, which really represent a tremendous transfer in global income,'' said Yergin of Cambridge, Massachusetts-based Cambridge Energy Research during the interview in Davos.

UBS, whose debt was 48 percent of assets, and Citigroup, at 47 percent, were more vulnerable than competitors with more customer deposits, such as Bank of America, where debt accounted for 39 percent of assets, and HSBC, where it was 19 percent, according to Bloomberg data based on 2006 figures.

Investors rewarded European banks that relied on growth in emerging markets. HSBC generated half of its pretax profit in emerging markets in the first six months of 2007. Spain's Banco Santander SA, placing ninth, generated about one third of its profit in Latin America in the first nine months and paid 20 billion euros for a unit of Amsterdam-based ABN Amro last year to more than double its presence in Brazil.

High Chinese Valuations

``Banks like HSBC and Santander that have higher exposure to emerging markets than traditional developed-market banks are attracting more investors because those markets are flying despite the U.S. slowdown,'' said Ronny Rehn, a London-based analyst at Morgan Stanley.

Chinese banks raised more than $73 billion in share sales since June 2005 and extended 3.6 trillion yuan of new loans in 2007. ICBC has almost doubled in Beijing trading since the record $22 billion initial public offering of almost 15 percent of its shares in October 2006. It has about 180 million customers.

``I always joked with my colleagues that it's not that we are doing well, it's just that our rivals overseas are doing badly,'' ICBC Chairman Jiang Jianqing said in a Nov. 29 interview. ``Being the world's largest bank by market value is not our goal. What we want to become is the most profitable.''

Chinese banks are now among the most expensive in the world relative to earnings, assets and revenue. Investors pay 28 times estimated full-year profit for ICBC shares in Shanghai and 19 times in Hong Kong, Bloomberg data show. That compares with about 11 times for New York-based JPMorgan and 10 for HSBC.

Difficult to Compare

ICBC expects to report net income of more than $10 billion for 2007, trailing Bank of America's $15 billion and exceeding Citigroup's $3.6 billion. China Construction Bank estimated on Jan. 17 that earnings rose 48 percent last year to about $9.5 billion. ICBC's return on assets was 0.71 percent in 2006, compared with 1.27 percent for Citigroup.

``China's capital market is a closed one, and that's why it's hard to compare valuations with overseas peers,'' said Zheng Jie, a Shanghai-based bank analyst at Industrial Fund Management Co., which manages 38 billion yuan. At Bank of China, for example, 67 percent of stock is locked up.

China's Banking Regulatory Commission is clamping down on loan growth after the nation's cabinet identified overheating and inflation as two major risks facing the economy in 2008.

Comparisons With Japan

The rally in Chinese banks has also drawn comparisons with the Japanese stock market bubble of the 1980s and subsequent collapse. Tokyo-based Nomura Holdings Inc.'s market value climbed in 1987 to $76 billion, the largest of any financial institution, and 18 times bigger than New York-based Merrill Lynch & Co., the largest U.S. brokerage. The biggest Japanese bank is now Mitsubishi UFJ Financial Group Inc., placing 10th in the world.

Loans outstanding in China are equivalent to 111 percent of gross domestic product, a larger ratio than in Japan during the bubble era, KBC Securities Japan analyst Kristine Li wrote in a Jan. 15 report to clients. Market values relative to loans outstanding jumped to 64 percent in China, compared with a maximum 40 percent in Japan before shares tumbled, she said.

``It's a well-known secret that the Chinese banks have a bad loan problem,'' said Whitehead of Boston University. ``But part of the presumption among investors may be that the Chinese government will step in if something bad happens.''

The following is a table of the world's biggest banks by market capitalization in current U.S. dollar terms, showing their rank at the end of January 2008, 2007 and 2003.

1/31/08 Mkt cap ($bln) 1/31/07 1/31/03

1 ICBC 277.514 4 NA
2 Bank of America 195.933 2 2
3 HSBC Holdings 176.788 3 3
4 China Construction 165.234 7 NA
5 Bank of China 165.087 6 NA

6 JPMorgan Chase 159.615 5 9
7 Citigroup 140.698 1 1
8 Wells Fargo 112.365 11 4
9 Banco Santander 109.862 12 23
10 Mitsubishi UFJ Financial 105.412 9 22

11 ABN Amro+ 103.643 34 29
12 UniCredit 97.591 15 32
13 Intesa SanPaolo 89.954 16 46
14 BNP Paribas 88.487 14 15
15 Goldman Sachs 87.602 18 18

16 UBS 84.878 8 7
17 BBVA 78.302 19 25
18 Sberbank 77.713 31 109
19 Royal Bank of Scotland 76.023 10 6
20 Wachovia 75.401 13 8

+ RBS, Santander and Fortis agreed to buy ABN Amro in 2007.

To contact the reporter on this story: Aaron Kirchfeld in Frankfurt at [email protected]

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