Among the ten major developed markets, the U.S. banking industry posted the second-lowest TSR in 2007, at 21 percent - a drop of 41 percentage points from 2006. U.S. banks' five-year TSR ranked last, at 8.7 percent.
Since the end of 2007, shareholder returns in the banking industry, in general, have deteriorated rapidly: in less than three months, the sector's market cap has dropped by more than 15 percent, to $7 trillion from $8.3 trillion.
A Year with Two Halves
Recent events, including the sudden collapse of Bear Stearns, have provided dramatic evidence that the deepening crisis is both profound and pervasive. Early signs of its impact, however, became increasingly visible last year. Indeed, the report - which analyzes a sample of banks representing more than 75 percent of total banking market capitalization - shows that 2007 was a year with two halves.
In the first half of 2007, the sector's market capitalization grew by 5.7 percent. In the second half, as the crisis became more widespread, banks lost $269 billion in market value. "For the year, North American and Western European banks together lost $695 billion of value -- more than the GDP of the Netherlands," noted Eric Olsen, a BCG senior partner and managing director, and a coauthor of the report.
A Huge Divide Between Developed and Emerging Markets
A gaping performance divide separated ten major developed markets from the rest of the banking world. Banking TSRs in these developed markets fell to an average of about 13 percent, while the average TSR outside these markets was about 27 percent. Emerging markets, in particular, avoided much of the turmoil and provided a counterweight to the weak performance of Western and Japanese banks.
"Even by the unique standards of emerging markets, the growth of banking in the BRIC countries -- Brazil, Russia, India, and China -- has been astounding," said BCG senior partner and managing director Sunil Kappagoda, another coauthor of the report. "Revenues of banks in BRIC countries were fueled by the emergence of an immense middle class and strong underlying economic growth."
The performance divide reordered the ranking of the world's biggest banks. Three of the four largest banks, by market cap, were Chinese: ICBC, China Construction Bank, and Bank of China. By comparison, the three largest U.S. banks, which had dominated the ranking in previous years, lost ground. Four of the seven new entrants in the 30 largest banks were from BRIC countries.
The upheaval has carried into 2008, with major U.S. and U.K. banks continuing to lose substantial amounts of market value.
Placing TSR at the Center of Strategy
In an environment that is growing more turbulent and competitive by the day, the report says, banks must place TSR at the heart of corporate strategy. "Banks can gain more control over their destiny by fusing financial, investor, and business strategy, and by focusing squarely on an explicit TSR goal," Kappagoda said. "This approach differs from how many banks develop their long-term strategies; TSR has traditionally been seen as an outcome, rather than an input, of business strategy." The report outlines steps that banks should take to develop an integrated, TSR-centric strategy.
