The global banking industry has shed more than $5.5 trillion in market value since the financial crisis first took root in the third quarter of 2007, and it will take years to remake itself and recover, according to a study to be released today by a Boston consulting firm.
John Garabedian, a senior partner and managing director at Boston Consulting Group, said it could take banks around the globe anywhere from seven to 10 years to recoup their losses in market value. The lengthy timeline stems entirely from banks' need to review all business lines in order to boost overall profitability, he said in an interview Tuesday.
"There is going to be a return to the basics" of lending and deposit gathering, even for the world's biggest banking companies, Mr. Garabedian said. "There will be much more disciplined risk taking … and lower, but truer, margins for the industry. We really are witnessing a reshaping of the entire landscape."
Boston Consulting Group paid particular attention to the world's 30-biggest banking companies, which collectively lost 47% of their market value last year, to $1.7 trillion. Though every one of these companies slid in value, Mr. Garabedian noted, the ones that pursued more disciplined growth strategies and had avoided large acquisitions in prior years held their value better than their peers.
Still JPMorgan Chase & Co., which has been an active acquirer, ended the year as the largest banking company, with a market value of $117.7 billion at Dec. 31. HSBC Holdings PLC in the United Kingdom was a close second, at $115.2 billion. Both companies have seen their market values shrink since yearend 2008. JPMorgan Chase is down 23.6%.
Wells Fargo & Co. in San Francisco held up best among the 30-biggest companies, with a 3% decline in market value last year. As a result it placed among the 10-biggest banks at yearend. (Wells' market value, however, has fallen another 39% so far this year, since its acquisition of Wachovia Corp. and its reporting of a $2.55 billion fourth-quarter loss.)
HSBC, Wells, and Banco Bilbao Vizcaya Argentaria SA in Madrid all were part of a "seismic shift" in valuations last year, joining the ranks of the top 10 as measured by market value. Mr. Garabedian said it is unlikely that the rankings will soon change dramatically, because more companies are likely to gravitate to more conservative business models.
"Going forward it becomes a matter of who can compete and gain market share" in traditional businesses, he said. "More institutions will be forced to take a look at their businesses to determine what is core and where they can get good margins."
These sentiments are being echoed by a growing list of industry observers.
Richard Bookbinder, the managing member of Bookbinder Capital Management LLC in New York, said last week that most banking companies are likely to focus on traditional lending, whether by internal decisions or pressure from regulators. "The banking model is being altered dramatically as we speak," he said in an interview. "In three to five years the model will resemble what it looked like 20 years ago."
Mr. Garabedian said Tuesday's announcement by Barclays PLC that the London company will quit wholesale mortgage originations in the United States offers another good example of large banking companies' paring back. "A lot of people jumped into wholesale mortgage without a realistic view of the business and the risk capabilities required," he said. (See related story.)
Mr. Garabedian said the big declines in market values could also stymie acquisitions. Boston Consulting Group and UBS AG's investment bank did a survey from September to November that found two-thirds of bankers saying they believed transformative deals are likely. However, Mr. Garabedian said a new survey would probably find significantly fewer answering that way.
"I don't see a lot of transformational deals occurring over the next 12 to 24 months," he said. "For starters, a number of those deals have already been done. Would-be global buyers are having their own difficulties at this time. For now the focus will be cleaning up balance sheets."