United States Commercial Banking Report Q4 2009

We now rate 59 banking systems, and it is little surprise that the developed states dominate the top spots.

The US and the UK are first and second place, with scores of 88.7 and 88.0 out of 100, respectively. Of crucial importance to both scores are the very high ratings in the crucial 'Risks to realisation of returns - Market structure' sub-category, which accounts for 42% of the overall score. These two countries are rated first and second in this category as well. This sub-category captures the size of the sector and the potential for assets and loans to grow in US dollar terms. While both systems have been buffeted by the global credit crunch and will not post stellar growth numbers in percentage terms for the foreseeable future, the sheer size of the US and the UK's financial systems means that there is massive potential for deposits, assets and client loans to rise. In addition, the generally solid institutional framework - which looks set to be augmented with new post-credit crunch regulations - will continue to provide a firm basis for the sector.

A Mixed Bag For The Developed States Just behind the US and the UK is a clutch of major developed state economies, including France (82.9, 3rd), Germany (80.5, 4th), Canada (79.9, 5th), Australia and Italy (78.4, joint 6th). All of their banking sectors have reasonable prospects into the medium term, having a large deposit and loan base, as well as the potential to grow substantially in volume (even if not percentage) terms. However, several states are notable by their absence in this cluster. Austria falls somewhat short (72.4, 12th) of the pack, along with Greece (69.4, 16th), but it is the poor performances of Switzerland (62.7, 26th) and Japan (56.3, 34th) that really stand out. Both countries are going to struggle to post increases in asset or loan growth in US dollar terms over the forecast period through to 2013, partially as a result of currency moves to the downside, but also in the case of Switzerland because of the relative weakness of the two key banking groups, UBS and Credit Suisse that built up large franchises during the good years.

Asia Rising Significantly, just behind the main group of European economies, several Asian states have managed to post strong performances in our risk ratings. Malaysia (72.1, 11th) and Singapore (77.1, 8th) come in ahead of Austria. However, Singapore leads globally in the 'Risks to realisation of returns - Country risk' sub-category with a score of 84.0, while South Korea scores 64.0. Singapore's high score rests on good scores for key elements of the economic, political and business environment risk ratings, which measure the risks to policy continuity. In contrast, the small size of the economy and banking sector is a major factor limiting the potential for expansion, especially in a world of lower liquidity and risk appetite.

South Korea, however, has a large domestic economy to provide the deposit base necessary to fund credit growth.

Elsewhere in Asia, we note that China (overall score 75.1) ranks 9th overall. As the world's third biggest economy - and still an emerging one at that - it is little surprise that the scope for asset growth in China is huge. This has allowed the country to be ranked fourth in the 'Limits of potential returns' category (74.0), and post the highest 'Limits of potential returns - Market structure' sub-category score with 90.0. What prevents China from rising any higher is its poor performance in the 'Limits of potential returns - Country structure' sub-category, with 57.5 (42nd), and the 'Risk to realisation of returns' category, with 80.0 (9th).

Of particular concern is the potential for a collapse of the local system, because much lending is still state directed and risk management is still embryonic. In addition, despite the size of the whole economy, per capita GDP remains low. We forecast it at US$3,024 for 2009, with significant income inequalities. This severely limits the ability of financial institutions to sell premium products in the local markets, and also means that average deposit levels are still very low.

Emerging Europe, Limited Opportunities The Central and Eastern European (CEE) states are posting surprisingly mediocre ratings outturns. We highlight the potential for a systemic crisis in the region as the major Western European banks removing credit and capital from CEE. These risks are exacerbated by the deep recessions we see in the Baltic states, Bulgaria, Russia and Turkey, and the risks of further currency crises that could create even greater economic dislocations, as the massive economic asymmetries that have built up in the region unwind.

When taken in tandem with the relatively small size of the local economies and the rapid banking sector expansion seen in recent years, it is little surprise that the highest rated CEE country is regional heavyweight Russia, with 73.8 (10th globally), and that the top 'new' EU member is the Czech Republic, with 64.5 (24th). Coming close to the bottom of the regional and global groups are Latvia (39.0, 55th) and Ukraine (43.0, 51st), which have both been forced to tap the IMF and EU for emergency funds.

MENA Below Par The big story in recent years in the Middle East and North Africa (MENA) banking sectors has been high oil prices in recent years. Hydrocarbon revenues have swollen bank balances across the Gulf region, with significant amounts of capital and liquidity finding its way to North Africa as well. With the days of stellar oil prices gone for now (and not likely to return over the forecast period) the outlook is not so positive for the region, and this is reflected in the fact that the two highest rated countries are the UAE at 14th and Saudi Arabia at 21st. No other MENA state has broken into the top 25 of our 59-strong ratings universe. Of particular concern is that while some progress has been made on putting the region's financial infrastructure on a more sustainable footing in recent years, it is still far too dependant upon oil revenues, and there are few drivers of either economic or commercial banking growth outside the natural resources sector. Indeed, it is particularly worrying that not one MENA state has broken in to the top 10 states in the 'Limits of potential returns - Market structure' sub-category. The best performer is the UAE, in 18th place, and even with the growth of Islamic banking products, the boom years are over. We expect much more moderate growth in the financial space over the forecast period.

Opportunities In Africa While Africa remains one of the most 'under-banked' regions in the world - and therefore one of the most insulated from the global credit crunch - the commercial banking business environment ratings still reflect the major problems in operating even in the region's largest economies. South Africa's overall 70.5 rating score put it in 13th place globally, while in the 'Limits of potential returns - Market structure' category it scores 73.3, but it receives poor score for 'Risks to realisation of returns - Country risk', at 56.0. The country's main weaknesses, in common with Kenya and Nigeria, are bureaucracy, external economic risk and financial market risk, all of which deter potential investors from engaging more fully in the local market.

Diverse Latin Performance In Latin America, the ratings do not tell one particular story, with a widely diverse regional picture developing. Perhaps the most interesting story is among the worst performers, which include Argentina (43.0, 49th), Colombia (50.3, 43rd) and Venezuela (36.0, 56th). All three economies face difficult times in the coming years having been fiscally imprudent. The latter two (especially Venezuela) benefited significantly from the oil boom that has now come to an end. There is little to be optimistic about in any part of the ratings for these countries, and we anticipate a much weaker performance than in Brazil (66.5, 23rd), Chile (66.6, 22nd) or Mexico (67.6, 20th). Of particular note is Brazil's crucial 'Limits of potential returns - Market structure' sub-category rating of 80.0 (7th globally) and Chile's reasonably solid 80.0 'Risks to realisation of returns - Market structure' rank of 11th.