Not long ago, my colleague, Alan Gula, wrote that the U.S. banking system was the envy of the world.
Is this right? Well, it all depends on how you measure banks. After all, there are many ways to peel an onion.
As anyone in finance or economics knows, ranking banks is always controversial, as there are many tools to use – and it can be forever argued which of those tools holds more weight. Alan’s article measured banks based on their tangible common equity (TCE) ratios.
Another tool is Global Finance’s World’s Safest Banks 2015 top 50 study.
In order to be named one of Global Finance’s 50 safest banks in 2015, financial institutions must hold two credit ratings of at least AA- and one no lower than A+, or an equivalent combination from among the three major international credit rating agencies (Moody’s, Fitch, and Standard & Poor’s).
Furthermore, each qualifying institution must be among the 500 largest banks in the world by assets.
Eligible banks are then scored based on their rating, with 10 points awarded for an AAA rating down to one point for a BBB- rating. If a bank is rated by only two of the agencies, an implied score for the third rating is created by taking an average of the other two scores and then deducting one point.
Finally, banks that are wholly owned by other banks aren’t eligible. If multiple banks score the same number, they’re further ranked by asset size as of the end of 2014. This approach underscores the strong positive correlation between a bank’s high credit ratings and its size.
Here are the highlights from the Global Finance 2015 report:
- The safest bank in the world is in Germany. With assets of $594 billion, KfW reigns supreme, taking the No. 1 position with an AAA rating from all three agencies.
- Three other banks were also awarded AAA ratings across the board: Switzerland’s Zurcher Kantonalbank (#2), Germany’s Landwirtschaftlich Rentenbank (#3) and Germany’s Landeskreditbank Baden-Wurttemberg – Forderbank (#4).
- The three S. banks that made the cut were AgriBank (#30), CoBank (#45), and AgFirst (#50).
- European banks dominate, accounting for 22 of the top 50. In fact, government-owned banks or those with ties to state or regional authorities occupy the first nine places on the list.
- Other countries with multiple listings include Canada (six), Australia (four), and the Gulf States (three), but none from other Middle Eastern nations or sub-Saharan Africa made the list. One Chilean bank, BancoEstado (48), represented the only Latin American bank.
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Other bank safety studies had a regional focus. In the North American top 10 study, Canadian banks hold the first three places. Only four U.S. banks made the list – the three mentioned above plus U.S. Bancorp (#10).
A further study lists the top 50 safest banks in the emerging markets. One A rating and two A- were sufficient to ensure inclusion in this study. Here, banks based in the GCC (Gulf Cooperation Council) and Asian nations represented 44 of the 50, with the GCC holding 23 spots. In Asia, Korean banks held nine positions and Chinese banks held eight.
The National Bank of Abu Dhabi is ranked No. 1 here and is the only one to hold three AA ratings (no banks on the list hold a rating higher than AA).
The reason being, many large banking systems in emerging markets – such as those in Brazil, India, Russia, and Turkey – are penalized by being in countries with low sovereign credit rankings. In practice, a bank’s rating can’t exceed its country’s sovereign rating. Middle East countries are generally investment-grade.
Note that Global Finance performs country-by-country bank rankings that provide insight on a far larger range of banks – with the exception of some countries where there are information gaps, such as Laos, Honduras, and parts of sub-Saharan Africa and the Middle East.
U.S. Fares Better in Commercial Bank Study
Another Global Finance study ranked the 50 safest commercial banks for 2015.
This study is made up of financial institutions not majority-owned by a government or state agency, with all other criteria being the same. For the second year in a row, Canada’s TD Bank Group ranks No. 1.
Here, the U.S. had a bigger presence (eight banks) than the other studies. In addition to the four U.S. banks mentioned above were BNY Melon (#33), Wells Fargo (#41), State Street (#43), and Northern Trust (#45).
Lastly, when looking at the 50 biggest global banks by size, European banks make up the largest geographic group, with 21 banks from eight different countries. The U.S., by contrast, holds seven spots.
The combined total assets of all 50 were just shy of $69 trillion at the end of 2014. The increase in size of Chinese banks was offset by a decline in eurozone banks, as the euro lost 10% of its value against the U.S. dollar. Japanese banks also faced a similar devaluation.
Note that a rating isn’t a recommendation to purchase, sell, or hold a security. If, however, you’re looking to hold the debt of one or a group of financial institutions, it’s always important to know the appropriate rate of return for the risk being taken.
Needless to say, a number of macro-economic factors this year, particularly the strengthening U.S. dollar and the sharp drop in crude oil prices, should make for quite an interesting study in 2016.