DEVELOPED STATES INVESTMENT OPPORTUNITIES IN COMMERCIAL BANKING: RISK/REWARD ANALYSIS - Fitch Solutions
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DEVELOPED STATES INVESTMENT OPPORTUNITIES IN COMMERCIAL BANKING: RISK/REWARD ANALYSIS
Developed states Investment
Opportunities In Commercial
Banking: Risk/Reward Analysis
Published by: BMI Research
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kind as to the accuracy or completeness of any information hereto contained.Developed states Investment Opportunities in Commercial Banking: Risk/Reward Analysis
CONTENTS
United States - Q4 2017 ................................................................................................................................... 3
Financial Services Forecasts (United States 2015-2020) ........................................................................................................................................... 7
Financial Services Forecasts (United States 2021-2026) ........................................................................................................................................... 7
Japan - Q4 2017 ............................................................................................................................................... 8
Financial Services Forecasts (Japan 2015-2020) ...................................................................................................................................................... 9
Financial Services Forecasts (Japan 2021-2026) .................................................................................................................................................... 10
Finance & Public Services Forecasts (Japan 2015-2020) ....................................................................................................................................... 10
Finance & Public Services Forecasts (Japan 2021-2026) ....................................................................................................................................... 11
Germany - Q4 2017 ........................................................................................................................................ 12
Financial Services Forecasts (Germany 2015-2020) ............................................................................................................................................... 13
Financial Services Forecasts (Germany 2021-2026) ............................................................................................................................................... 13
Banking - United Kingdom - Q4 2017 .......................................................................................................... 14
Methodology .................................................................................................................................................. 16
Industry Forecast Methodology ...................................................................................................................................................................................... 16
Sector-Specific Methodology .......................................................................................................................................................................................... 17
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United States - Q4 2017
BMI View: The United States has the largest and most well-developed financial services sectors in the
world as well as the most developed and deepest capital markets. Regional banks hold expertise in local
and regional sub-national economies that provide tailored services and products. The banking sector
enjoys a global reach with numerous institutions hold operations across Latin America, Europe, the
Middle East and Asia. The election of Donald Trump has reinvigorated the push for relaxing several
measures of regulations that in part weighed down profit margins, lending growth and new market
entrants. So far progress on the regulatory front has been slow but, given the support from the Federal
Reserve in reducing the regulatory burden, we expect key measures regarding capital buffers, dividend
payouts, stress test compliance and lending restrictions to be eased in the quarters ahead. This, alongside
a stable economy domestically and abroad, we expect will lead lending growth to rebound from a current
weak period.
Banking sector fundamentals have indeed improved since 2016 but loan growth so far in 2017 has been
weaker than expected. While industrial activity has improved, commercial and industrial loans have
stalled while consumer credit, particularly for mortgages and autos, has stagnated. As such, we have
revised our forecast for loan growth to 3.5% from 5.0% in 2017. Several banks have noted increasing
their credit standards for commercial real estate loans, citing strong price appreciation and uncertainty
over the US' growth prospects amid increasing gridlock in Washington. The sector is well capitalised and
asset quality is strong. We expect lending to stabilise in the months ahead and still see risks to the upside
amid a deregulatory push geared towards aiding smaller, regional banks.
© Business Monitor International Ltd Page 3Developed states Investment Opportunities in Commercial Banking: Risk/Reward Analysis
Financial Sector Pivotal To Economy
United States - Finance Industry & GDP
e/f = BMI estimate/forecast. Source: BEA, BMI
Our forecasts for the US insurance sector remain positive despite the potential economic and political
headwinds that may result from the recent change in administration. Long-term demographic trends
remain a crucial driving force of demand for both life and non-life premiums. In particular we note the
growth of the country's retirement age demographic which is creating a need for life insurance coverage,
as well as rising income levels, which are supporting demand across a number of personal insurance lines.
Additionally, we note that the non-life market has seen recent attempts towards consolidation but two
high-profile mergers have been blocked in H117, suggesting that the regulatory winds are sceptical of
further moves towards consolidation at this time.
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Leading The Way
United States - Risk/Reward Index Banking And Financial Services
Source: BMI
The US' asset management sector is also a major industry on a global comparison being the largest in the
world. The sector is extremely competitive and the trend of mergers and acquisitions will persist over the
coming years as asset managers look for increased scale and cost-cutting synergies to boost profits. The
market will continue to be strong, but increasing consumer savvy and risk aversion may present
challenges - particularly over a long-term horizon as interest rates begin to rise and encourage saving over
investment, and as innovation in fintech startups starts to push out traditional investment channels and
drive consumer costs lower. The coming of age of the millennial age cohort will likely see an increase in
demand for asset management services but we caution that years of meagre wage gains, high student loan
debt and record-low home ownership rates will necessitate new strategies from asset managers to gain a
foothold in this key demographic. On the regulatory front, outgoing Security and Exchange Commission
(SEC) Chair Mary Jo White's major initiatives will likely endure in 2017 and 2018 as they seek to
enhance transparency, incentive alignment, and risk control. However, President Donald Trump's
Executive Order ordering the review of the Department of Labor's fiduciary rule will likely delay the
rules implementation or abolish completely.
The stock market in the US is again the world's largest with the New York Stock Exchange and the
NASDAQ taking the top two spots globally regarding exchanges. US exchanges host trading for some of
the largest companies in the US and around the world and are the primary market makers for commodities
(Chicago Mercantile Exchange). New York and Chicago are the major global locations for trading of
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bonds, currencies and derivatives, and will continue to hold a leading position in the market for the
foreseeable future.
Latest Trends & Developments
Wells Fargo (US' third largest bank) reported a profit of USD5.81bn, or USD1.07 a share. That
compares with USD5.6bn, or USD1.01 a share, in the same period of 2016. Net interest income
was up 6.4% y-o-y in Q217.
The bank's results included a USD186mn tax benefit during the Q217, most of which was related
to a deal it reached in June to sell its commercial insurance business to USI Insurance Services.
Citigroup (US' fourth largest bank) beat earnings estimates (USD1.28 per share versus USD1.21
expected) amid its robust share buyback programme and resilience in trading revenue.
JP Morgan (US's largest bank) posted a record profit for Q217 amid a boost in commercial and
consumer lending businesses that offset weak trading revenues and net interest income. EPS
came in at USD1.82 versus USD1.58 expected.
Low volatility, strong competition in mortgage lending and weaker prospects for the economy
may weigh on credit creation in the months ahead; bank shares fell after earnings releases on
July 14.
The non-life insurance market has seen a couple of high-profile merger attempts in H117
with Anthem looking to acquire Cigna for an estimated USD48bn and Aetna's efforts to
acquire Humana. Both mega-mergers have been blocked by antitrust authorities and the judicial
system has taken an unfavourable approach towards further consolidation efforts in the market
citing threats of reduced competition.
Insurance association LIMRA has published a report highlighting the gender gap in the US life
insurance sector. The report shows that 56% of US women currently have life insurance
coverage, compared with 62% of men. The report also states that the average policy of female
policy holders is worth about USD160,000, while US males hold a policy worth USD206,000 on
average.
Atalaya Capital Management closed a deal in June selling a passive, minority stake to Neuberger
Berman's Dyal Capital Partners for USD80mn in a bid to bolster its capital buffer amid a late
credit cycle and lower profits within the industry.
NYSE American starts July 24 with a 350-microsecond delay to trades, mimicking the
delay IEX uses on its Investors Exchange to protect investors from predatory kinds of speed-
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based trading; it will be 78% cheaper to place some kinds of trades on NYSE's market versus
IEX's.
Exchange operator Nasdaq told lawmakers July 14 that systemic risk in the USD13.9trn US
Treasury market would be reduced by requiring trades be guaranteed by clearinghouses.
Regulators required more extensive use of central clearing for such financial derivatives as
interest-rate swaps after the 2008-9 financial crisis. But the vast majority of secondary-market
trading in US Treasurys doesn't involve a central clearinghouse, as many electronic trading firms
that are major players in the market find it too expensive to pay the margin requirements and
fees.
Financial Services Forecasts (United States 2015-2020)
2015 2016e 2017f 2018f 2019f 2020f
Finance nominal GVA,
USDbn 1,275.45 1,302.98 1,356.12 1,412.47 1,470.65 1,529.14
Finance USD nominal
GVA growth, % y-o-y 4.3 2.2 4.1 4.2 4.1 4.0
Finance nominal GVA, %
total GVA 6.37 6.27 6.28 6.29 6.29 6.30
e/f = BMI estimate/forecast. Source: BEA/BMI
Financial Services Forecasts (United States 2021-2026)
2021f 2022f 2023f 2024f 2025f 2026f
Finance nominal GVA,
USDbn 1,589.86 1,652.76 1,718.52 1,786.41 1,857.28 1,934.72
Finance USD nominal
GVA growth, % y-o-y 4.0 4.0 4.0 4.0 4.0 4.2
Finance nominal GVA, %
total GVA 6.31 6.31 6.32 6.33 6.34 6.35
e/f = BMI estimate/forecast. Source: BEA/BMI
© Business Monitor International Ltd Page 7Developed states Investment Opportunities in Commercial Banking: Risk/Reward Analysis
Japan - Q4 2017
BMI View: Across all four sub-sectors of the financial services industry that we cover - namely banking,
insurance, asset management, and stock exchanges - Japan is in a solid position, and by extension plays
an important role in Asia. More specifically, the banking sector is enjoying a solid run in deposit growth,
the insurance sector is seeing both the life and non-life sub-sectors go off in search for additional
opportunities overseas, the asset management industry is coming off the back of four consecutive years of
growth through to the end of 2014, and the Tokyo Stock exchange remains the world's fourth most
popular by total market capitalisation. Ending the focus on deregulation, the post global financial crisis
era has seen regulators apply more stringent oversight of the financial services sector in Japan, a trend
we expect to see continuing to tighten going forwards, as Japan looks to appeal to overseas investors.
After all, while the Japanese financial sector is well placed to weather market shocks and continue
growing, it remains very much a local affair. For example, just four of the 2,019 stocks listed on the
Tokyo Stock Exchange as of April 28 2017 were marked as originating from overseas.
Recent Trends & Developments
News reports have suggested that Japanese regional banks are considering merging in a bid to
achieve economies of scale amid an increasingly challenging domestic environment as the BoJ
keeps interest rates negative. However, strong regional identities are likely to present headwinds
as banks remain reluctant to merge and possibly lose their regional identities.
The expansion of the number of Japanese banks using Ripple, a provider of blockchain solutions
to complete international transactions faster, has increased to 71 from 47 previously. This is
likely to be positive for the development of fintech in Japan and could help improve operations
in Japanese banks.
Japan's banking is in a strong position, and looks set to continue strengthening going forward across our
forecast period - albeit with a steady decrease in banking sector assets share of GDP, something which
has been accelerating rapidly over recent years. At the same time, deposit growth has been enjoying a
'purple patch' that has seen it record its fastest growth pace on record going back to 1993. We expect the
sector's strength to continue, and see it placing increased upside pressure on inflation going forward.
While it is difficult to say at what point there will be a shift in the 'deflationary mindset', rising
government bond yields could act as a trigger.
The Japanese insurance industry is in an equally strong position, but it is not enjoying the growth that it
once did. The non-life segment remains competitive but, for most players, profitable. Particular
companies are enjoying mid-single digit growth in some lines. Overall, however, premiums are rising
broadly in line with nominal GDP. Life companies are encroaching into health, medical and aged care
insurance, meanwhile, in order to diversify their revenue streams. Within this, many Japanese insurers are
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pursuing growth opportunities outside Japan. Nevertheless, profitable niches remain for foreign groups in
the market that have scale. Meanwhile we continue to hold the view that life insurance continues to play a
central role in organised savings (and protection) in Japan at a time when premiums are rising slowly.
Against this backdrop, we are seeing a gradual consolidation of the competitive landscape in the
insurance sector in Japan.
Financial Services Forecasts (Japan 2015-2020)
2015 2016e 2017f 2018f 2019f 2020f
Finance nominal GVA,
USDbn 194.64 261.04 266.04 269.33 280.38 299.34
Finance USD nominal
growth, % y-o-y -9.6 34.1 1.9 1.2 4.1 6.8
Finance nominal GVA,
JPYbn 23,556.80 28,405.37 29,796.19 31,511.90 33,926.40 36,519.55
Finance JPY nominal
GVA growth, % y-o-y 3.3 20.6 4.9 5.8 7.7 7.6
Finance nominal GVA, %
total GVA 5.63 6.36 6.52 6.71 6.96 7.22
e/f = BMI estimate/forecast. Source: BMI, Cabinet Office
After several years of rapid growth, the expansion of Japan's asset management industry is finally
levelling off, and we expect that to continue to be the case in 2017. We point to the slowdown in net
inflows into the industry in 2016 as a leading indicator of this trend. In such a climate, the risks to the
downside for the industry's prospects are becoming increasingly stacked to the downside; however, our
core view is not to see a drop off in industry growth even with the wave of extra scrutiny that is
continuing to focus in on the sector.
The Tokyo Stock Exchange is the fourth largest globally and is the largest in Asia. Despite both its global
and regional reach, we note that the exchange is overwhelmingly local-focused with just 4 of the 2,019
stocks listed on the bourse as of April 28 2017 marked as overseas. As part of the broader Japan
Exchange Group (JPX), the exchange is part of an organisation that is responsible for both trading listed
securities and derivatives instruments as well as providing clearing and settlement services and its own
regulatory oversight. The exchange and the JPX group are set to remain extremely important on both the
regional and global stage going forward.
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Financial Services Forecasts (Japan 2021-2026)
2021f 2022f 2023f 2024f 2025f 2026f
Finance nominal GVA,
USDbn 319.83 341.94 365.13 389.20 414.31 442.86
Finance USD nominal
growth, % y-o-y 6.8 6.9 6.8 6.6 6.5 6.9
Finance nominal GVA,
JPYbn 39,339.02 42,401.03 45,641.69 49,038.61 52,617.23 56,686.52
Finance JPY nominal
GVA growth, % y-o-y 7.7 7.8 7.6 7.4 7.3 7.7
Finance nominal GVA, %
total GVA 7.49 7.77 8.04 8.30 8.55 8.85
f = BMI forecast. Source: BMI, Cabinet Office
Finance & Public Services Forecasts (Japan 2015-2020)
2015 2016e 2017f 2018f 2019f 2020f
Finance & public services
nominal GVA, USDbn 1,105.68 1,347.36 1,328.38 1,294.45 1,282.75 1,305.34
Finance & public services
USD nominal growth, %
y-o-y -11.7 21.9 -1.4 -2.6 -0.9 1.8
Finance & public services
nominal GVA, JPYbn 133,819.60 146,611.91 148,778.49 151,451.19 155,212.45 159,252.01
Finance & public services
JPY nominal GVA
growth, % y-o-y 0.9 9.6 1.5 1.8 2.5 2.6
Finance & public services
nominal GVA, % total
GVA 31.96 32.83 32.57 32.23 31.85 31.49
e/f = BMI estimate/forecast. Source: BMI, Cabinet Office
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Finance & Public Services Forecasts (Japan 2021-2026)
2021f 2022f 2023f 2024f 2025f 2026f
Finance & public services
nominal GVA, USDbn 1,330.44 1,358.18 1,387.70 1,418.68 1,451.41 1,489.59
Finance & public services
USD nominal growth, %
y-o-y 1.9 2.1 2.2 2.2 2.3 2.6
Finance & public services
nominal GVA, JPYbn 163,644.12 168,414.06 173,462.30 178,753.96 184,328.66 190,667.72
Finance & public services
JPY nominal GVA
growth, % y-o-y 2.8 2.9 3.0 3.1 3.1 3.4
Finance & public services
nominal GVA, % total
GVA 31.16 30.85 30.55 30.25 29.96 29.78
e/f = BMI estimate/forecast. Source: BMI, Cabinet Office
© Business Monitor International Ltd Page 11Developed states Investment Opportunities in Commercial Banking: Risk/Reward Analysis
Germany - Q4 2017
BMI View: Germany's banking and financial services industry is one of the biggest in Europe. The
expansion in the highly fragmented German banking sector is likely to be dragged down by factors such
as extremely low interest rates and tighter regulations. Germany's asset management and stock exchange
will likely continue to be dominant in the region due to the country's economic strength.
The highly fragmented German banking sector will likely remain in consolidation over the coming years
as a combination of insufficient private demand, tighter regulations and ultra-low long-term interest rates
weigh on the sector's expansion.
Germany's insurance industry is highly competitive, and we expect some degree of consolidation as
insurers seek to capture a bigger share of the industry's still-solid growth path over the coming years.
Germany is one of Europe's key asset management centres and is the third largest market in the region
after the UK and France. This is likely to remain the case over the coming years due to its economic
strength. However, asset managers will have to adapt to the changing regulatory framework as
policymakers seek to strengthen the industry.
The Frankfurt Stock Exchange is Germany's biggest stock exchange and is also ranked highly globally in
terms of market capitalisation. The DAX is the country's benchmark equity index, and will continue to be
a closely watched index for investors that are involved in European stocks.
Latest Trends And Developments
Germany's banking regulators, the Bundesbank and Federal Financial Supervisory Authority
(BaFin), stated in a survey of 1,500 small and medium-sized banks (accounting for 88 percent of
institutions and 41 percent of total assets) that low interest rates will act as a significant drag on
the performance of these banks. The findings showed that these banks expect pretax profit to fall
by an overall 9% over the next five years.
Germany's major insurer Allianz announced in late August 2017 that it is pushing into Africa
(where most are uninsured), and is buying control of Nigerian insurer Ensure Insurance. Ensure
Insurance offers life and non-life cover to businesses and retail clients and generated EUR11mn
worth of gross premiums last year. Allianz has operations in 16 African countries and views the
acquisition as an opportunity to tap into Nigeria's strong demographics and economy.
Asset managers have to make clear to investors how much they are being charged for research
under the Markets in Financial Instruments Directive (MiFID); therefore, some German asset
managers are taking steps to reduce their reliance on external research. For example, Financial
Times reported that Union Investment, Germany's third largest asset manager, plans to reduce
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the number of research providers it uses, while Deutsche Asset Management is building up its
internal research arm.
German stock exchange operator Deutsche Börse Group has taken part in a USD5mn equity
investment in RegTek.Solutions Inc, together with UK-based financial technology venture
capital firm Illuminate Financial Management. RegTek.Solutions Inc is a US start-up that
provides software to help financial companies comply with trading regulations.
Financial Services Forecasts (Germany 2015-2020)
2015 2016e 2017f 2018f 2019f 2020f
Finance nominal GVA,
USDbn 123.03 127.52 128.44 128.48 127.25 127.37
Finance USD nominal
growth, % y-o-y -15.7 3.7 0.7 0.0 -1.0 0.1
Finance nominal GVA,
EURbn 110.93 115.26 116.76 118.96 121.19 123.66
Finance EUR nominal
GVA growth, % y-o-y 0.9 3.9 1.3 1.9 1.9 2.0
Finance nominal GVA, %
total GVA 4.06 4.09 4.05 3.99 3.94 3.89
e/f = BMI estimate/forecast. Suorce: BMI, EUROSTAT
Financial Services Forecasts (Germany 2021-2026)
2021f 2022f 2023f 2024f 2025f 2026f
Finance nominal GVA,
USDbn 129.86 132.50 135.17 137.99 140.87 143.86
Finance USD nominal
growth, % y-o-y 2.0 2.0 2.0 2.1 2.1 2.1
Finance nominal GVA,
EURbn 126.08 128.65 131.24 133.97 136.77 139.67
Finance EUR nominal
GVA growth, % y-o-y 2.0 2.0 2.0 2.1 2.1 2.1
Finance nominal GVA, %
total GVA 3.85 3.80 3.76 3.71 3.67 3.63
e/f = BMI estimate/forecast. Source: BMI, EUROSTAT
© Business Monitor International Ltd Page 13Developed states Investment Opportunities in Commercial Banking: Risk/Reward Analysis
Banking - United Kingdom - Q4 2017
BMI View: The commercial banking sector retains strong growth potential over the long term, though we
expect that the recent surge in consumer credit will slow down in the coming months amid lower income
growth. In the commercial banking sector, levels of capital adequacy and asset quality are robust, and
the decision to leave the EU will have a much more significant impact on investment banking. However,
uncertainty regarding the relationship between the UK and the EU post-Brexit will remain a drag on
growth and investment across all banking sectors, and presents a risk to our constructive outlook over the
long term. Additionally, the reputation of the banking sector remains at low levels nearly a decade after
the start of the global financial crisis, adding a limit to growth. This will also be reflected in regulation,
which has been tightened in recent years - although Brexit may present the opportunity to relax some
rules.
Recent Trends & Developments
We expect client loan growth among households and non-financial corporates to slow in 2017 as
slower economic growth and uncertainty around the Brexit process put limits on both supply and
demand. That said, client loan growth will remain robust at 2.5% in 2017 and 3.0% in 2018 -
though much below the 4.4% recorded in 2016. The investment banking industry faces more
significant risks from Brexit, and will have a more negative impact should the UK negotiate a
'hard' Brexit defined by loose ties with the EU.
In April 2017, Portman Capital Partners announced renewed plans to lobby the government to
pursue an offload of the Royal Bank of Scotland Group (RBS) to the public. Portman had
suggested the plan in 2011, but the government decided to continue its plans to recoup the price
it had paid to bail out the bank in the financial crisis. However, Chancellor Philip Hammond
admitted in April 2017 that the government may be forced to sell its shares in RBS at a loss,
indicating that the government has accepted that the need to sell has overridden concerns about
the low share price, which has lost more than half of its value since the bank was bailed out in
2008. The sale of the government's shares is nevertheless still likely to be delayed by ongoing
legal and regulatory concerns, including an outstanding fine to be settled by RBS with the US
Department of Justice surrounding the bank's role in the sub-prime mortgage crisis.
In February 2017 the Prudential Regulatory Authority released a proposal for the refinement of
the Pillar 2A capital framework in order to reduce the disparity in capital requirements applied to
small banks (Standardised Approach) and larger institutions (Internal Ratings Based Approach).
The Financial Conduct Authority announced in March 2017 that it would impose a deadline of
August 29 2019 for claims under the mis-sold payment protection insurance scandal that has so
far reportedly cost UK banks over GBP35bn.
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Slowdown Amid Lower Income Growth
Total Banking Assets (2015-2026)
Source: BMI, BoE
© Business Monitor International Ltd Page 15Developed states Investment Opportunities in Commercial Banking: Risk/Reward Analysis
Methodology
Industry Forecast Methodology
BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and
causal/econometric modelling. The precise form of model we use varies from industry to industry, in each
case being determined, as per standard practice, by the prevailing features of the industry data being
examined.
Common to our analysis of every industry is the use of vector autoregressions, which allow us to forecast
a variable using more than the variable's own history as explanatory information. For example, when
forecasting oil prices, we can include information about oil consumption, supply and capacity.
When forecasting for some of our industry sub-component variables, however, using a variable's own
history is often the most desirable method of analysis. Such single-variable analysis is called univariate
modelling. We use the most common and versatile form of univariate models: the autoregressive moving
average model (ARMA).
In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data
quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a
basis for analysis and forecasting.
We mainly use OLS estimators, and, in order to avoid relying on subjective views and encourage the use
of objective views, we use a 'general-to-specific' method. BMI mainly uses a linear model, but simple
non-linear models, such as the log-linear model, are used when necessary. During periods of 'industry
shock', for example poor weather conditions impeding agricultural output, dummy variables are used to
determine the level of impact.
Effective forecasting depends on appropriately selected regression models. BMI selects the best model
according to various different criteria and tests, including but not exclusive to:
R2 tests explanatory power; adjusted R2 takes degree of freedom into account;
Testing the directional movement and magnitude of coefficients;
Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value); and
All results are assessed to alleviate issues related to auto-correlation and multi-collinearity.
Human intervention plays a necessary and desirable role in all of our industry forecasting. Experience,
expertise and knowledge of industry data and trends ensure analysts spot structural breaks, anomalous
data, turning points and seasonal features where a purely mechanical forecasting process would not.
© Business Monitor International Ltd Page 16Developed states Investment Opportunities in Commercial Banking: Risk/Reward Analysis
Sector-Specific Methodology
BMI's Banking & Financial Services Report series is closely integrated with our analysis of country risk,
macroeconomic trends and financial markets. The reports draw heavily on our extensive economic
dataset, which includes up to 550 indicators per country, as well as our in-depth view of each local
market. We collate our banking databanks from official sources (including central banks and regulators)
wherever possible, and only fall back on secondary sources where all attempts to secure primary data
have failed. Company data is sourced, in the first instance, from company reports, with central bank,
regulator or trade association data only used as a backup.
The banking forecast scenario focuses on total assets, client loans and client deposits.
Total assets are analogous to the combined balance sheet assets of all commercial banks in a
particular country. They do not incorporate the balance sheet of the central bank of the country
in question.
Client loans are loans to non-bank clients. They include loans to public sector and state-owned
enterprises. However, they generally do not include loans to governments, government (or non-
government) bonds held or loans to central banks.
Client deposits are deposits from the non-bank public. They generally include deposits from
public sector and state-owned enterprises. However, they only include government deposits if
these are significant.
We take into account capital items and bond portfolios. The former include shareholders funds,
and subordinated debt that may be counted as capital. The latter includes government and non-
government bonds.
In quantifying the collective balance sheets of a particular country, we assume that three equations hold
true:
Total assets = total liabilities and capital;
Total assets = client loans + bond portfolio + other assets;
Total liabilities and capital = capital items + client deposits + other liabilities.
In terms of the equations, other assets and other liabilities are balancing items that ensure equations two
and three can be reconciled with equation one. In practice, other assets and other liabilities are analogous
to inter-bank transactions. In some cases, such transactions are generally with foreign banks.
© Business Monitor International Ltd Page 17Developed states Investment Opportunities in Commercial Banking: Risk/Reward Analysis
In most countries for which we have compiled figures, building societies/thrifts are an insignificant part
of the banking landscape, and we do not include them in our figures. The US is the main exception to this.
In some cases, total assets and client loans include significant amounts that are owned or that have been
lent to customers in another country. In some cases, client deposits include significant amounts that have
been deposited by residents of another country. Such cross-border business is particularly important in
major financial centres such as Singapore and Hong Kong, the richer OECD countries and certain
countries in Central and Eastern Europe.
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