WORLD’S BEST BANKS 2014

Banks from the US are boosting their lending again, but European banks are not. The global banking system has partially recovered from the financial crisis, but large segments remain dysfunctional. The collapse of Banco Espírito Santo in Portugal was a shocking reminder that the system is fragile and there is little room for complacency. Nevertheless, there are plenty of examples of banks in all parts of the world that have excelled in meeting the needs of their customers over the past year.

Banks in the US increased their lending in the second quarter of 2014 at the fastest pace since the financial crisis, according to the Federal Deposit Insurance Corporation. The level of US bank lending topped $8 trillion for the first time ever.

Meanwhile, lending to the private sector by banks in the eurozone has continued to fall. In July bank lending declined by 1.6% on a year-over-year basis, the European Central Bank reported. Results of the ECB’s yearlong asset quality review and stress test are due this month.

“All signs point to the tough times continuing for many banks, particularly for those that are internationally active and complex,” says Stefan Best, Standard & Poor’s credit analyst. New regulatory and legislative initiatives are pushing up banks’ compliance costs and restricting revenue growth, he wrote in a recent issue of S&P’s CreditWeek. Banks have stopped their proprietary trading and shrunk their private equity and commodities businesses, Best says.

In addition, product margins will shrink through standardization and commoditization to allow for use of central counterparties for clearing, Best says. Banks’ operating, litigation and compliance costs are rising at the same time banks are facing limited opportunities of revenue increases from lackluster economies, he says.

Bank lending conditions in emerging markets eased in the second quarter of 2014 for the first time since early 2013, according to the Institute of International Finance (IIF), which surveyed 132 banks from emerging economies. While these banks reported a marked improvement in funding conditions and expansion in loan demand, they continued tightening credit standards as nonperforming loans continued to rise.

“Notably, both domestic and international funding conditions improved after being tightened sharply since the second quarter of 2013, when markets became concerned about the path of the Federal Reserve’s exit from QE [quantitative easing], with EM[emerging markets] Europe being a particular beneficiary,” the IIF says. While EM Europe saw a significant improvement in lending conditions, there was a further deterioration in lending conditions in Latin America. The Middle East and North Africa continued to have the most favorable bank lending conditions, compared with other EM regions.

In the eurozone, the ECB’s latest plan to stimulate the economy by making more cheap funds available to banks got off to a disappointing start. The ECB revealed on September 19 that commercial banks in the eurozone were using the central bank’s latest injection of low-cost credit to repay earlier, more expensive bailout loans, rather than to increase lending to businesses. The ECB said the banks repaid almost €20 billion ($26 billion) of credit from long-term refinancing operations in a single week, owing in part to weak
credit demand.

The takedown at the ECB’s inaugural auction in September of targeted longer-term refinancing operations (TLTRO) was only $107 billion of four-year loans, far less than many analysts had expected.  Marc Chandler, global head of currency strategy at Brown Brothers Harriman, says: “Generally speaking, while many are saying the program is a failure, others, including ourselves, want to reserve judgment until the December offering.” September was the first of eight TLTRO auctions that will be held by June 2016.

Meanwhile, the Bank of England, which pumped more than $600 billion of stimulus funds into the UK financial system through its bond-buying program, which began in 2009 at the height of the British recession, released research showing that the effort failed to increase bank lending. Nevertheless, the program did boost aggregate demand and inflation, the UK central bank says. The BofE says its experience with quantitative easing would not necessarily be repeated in other countries.

In addition to loans, corporations rely on banks for critical investment banking and transaction services. Treasury and trade solutions have been less affected by new capital requirements, although they require heavy investments in technology to remain best in class. In investment banking, low volatility in the second quarter of 2014 hurt trading income, although mergers and acquisitions remained strong.

Banks around the world remain highly vulnerable to legal and conduct-related risk, according to EY’s review of key themes discussed in earnings conference calls in the second quarter. Fines related to legacy issues remain a significant headwind, EY (formerly known as Ernst & Young) says.

“Uncertainties related to the size and timing of fines are significant, and as regulators continue to launch new investigations into such issues as currency manipulation and high-frequency trading, it is difficult for most banks to foresee the end of legal headwinds,” EY says.

Banks’ returns on equity reflect an ongoing drag from legacy issues and settlements with authorities, EY says. “Faced with lackluster revenue prospects, banks must find ways to achieve material cost reduction if they wish to generate better ROE performance,” according to EY. The firm found little evidence, however, that banks are planning to launch new expense-reduction plans.

Six years after the global financial crisis sparked a wave of unprecedented regulatory reform, many rules have yet to be finalized, EY says. As banks continue to build capital levels, they face significant uncertainties surrounding leverage ratios, qualifying capital instruments, and buffers for national and global systemically important banks, it adds.

In our 21st annual survey, Global Finance has selected the best banks in 150 countries and eight regions of the world. We also identify the best global banks in 14 service categories.

The winners are not necessarily the biggest banks but, rather, the best banks—those with the qualities corporations should look for when choosing a bank. These banks offer the most-effective risk-management systems, the best products and outstanding customer service.

We have selected the winners based on performance over the past year, as well as subjective criteria, including reputation and management excellence. Global Finance made the selections after extensive consultations with bankers, corporate financial executives and analysts worldwide.       

                                                         —Gordon Platt

GLOBAL WINNERS
BEST CORPORATE BANK
Citi

Citi’s corporate bank serves clients in more than 100 countries, having earned their loyalty through strong relationship banking and competitively priced products and services. Michael Corbat, CEO, says: “We will continue to invest in our treasury and trade solutions business, the backbone of our global network, while we capitalize on our focus on the payments side. This business is capital friendly and not easy for our competition to replicate. It took us decades to build and remains the clear global industry leader.” Last year Citi introduced tablet and smartphone versions of its most successful platforms, so that traders and treasurers can do business from anywhere with a wireless connection. Citi reported a stronger-than-expected profit in the second quarter of 2014, but a $7 billion settlement with the US Justice Department related to legacy mortgage-backed securities and collateralized debt obligations resulted in a $3.8 billion charge. Citi continued to increase lending in its core business areas and reduce its operating expenses.

—Michael Corbat, CEO
www.citigroup.com

Santander, the largest bank in the eurozone by market capitalization, is the biggest financial group in Spain and Latin America. Less known is the fact that Santander is a leading retail bank in the US by deposits and has significant operations in the UK, Portugal, Germany and Poland. In June 2014, Santander agreed to acquire GE Capital’s consumer finance business in Sweden, Denmark and Norway. Emilio Botin, chairman of Santander, says the acquisition is “an important step in Santander Consumer’s growth strategy and will strengthen its position as the leading consumer finance provider in Europe.” In the US, Boston-based Santander Bank operates in nine northeastern states and sponsors the Philadelphia Eagles football team. Dallas-based Santander Consumer USA, which originates and services auto loans, listed on the New York Stock Exchange in January.

—Ana Botín, chair
www.santander.com

Royal Bank of Canada’s wealth management unit reported a 22% increase in earnings in the third quarter ended July 31, compared with the same period a year earlier. RBC boosted the division with acquisitions in the past 10 years that are now paying off. With assets under management of about $675 billion, RBC Wealth Management is one of the five largest private banks worldwide. Its annual World Wealth Report, produced in association with Capgemini, is the leading industry benchmark for tracking high-net-worth individuals’ preferences and behaviors. The 2014 report showed that personal relationships between clients and wealth managers are still important, but digital capabilities are essential enablers and enhancers of the relationship.

—M. George Lewis, group head
www.rbcwealthmanagement.com

KFH, Kuwait’s largest Islamic bank, has successfully executed its strategy for regional and international expansion. It boasts a substantial distribution network and a strong funding profile. KFH has restructured and streamlined its business and strengthened its risk management. It has a strong and diversified investment base across retail and corporate banking and has participated in some landmark Islamic deals, including a $1.5 billion ijarah sukuk for the Turkish treasury. Kuveyt Türk, a KFH subsidiary, will open a German Islamic bank this year. KFH continues to set the pace for innovation in deposit products, including investment deposits via ATM machines. The bank applied the concept of ijarah, or “lease to own,” to a card, Baytik Ijarah, marking what it called “a new era in card finance” providing greater credit flexibility and capacity.

—Mohammed Al-Fozan, acting CEO
www.kfh.com

Citi’s extensive global network and innovative technology platforms enable it to serve corporations expanding in fast-growing emerging markets, as well as to help emerging markets companies to grow internationally. The bank derived more than 40% of its revenue and earnings from emerging markets last year, despite the EM sell-off on Federal Reserve tapering fears. Chief financial officer Michael Corbat has long been a supporter of Citi’s emerging markets activities. He is a former head of global emerging markets debt at Citi. In 2011, he became chief executive of Europe, the Middle East and Africa. Profits in Citi’s international consumer banking business are growing rapidly as a result of the rise of the middle class in Asia, Latin America and other emerging markets. At a time when the developed markets economies are growing haltingly, Citi’s emerging markets presence is a big positive.

—Michael Corbat, CEO
www.citigroup.com

Standard Bank, Africa’s biggest bank by assets, has a presence in 20 African countries, including South Africa, its base. Ben Kruger, joint chief executive officer, says: “Our distinctive African footprint has allowed us to gain strategic insights into the various African markets within which we operate, ensuring that we are uniquely placed to provide our clients with world-class service.” The bank has realized steady growth in the corporate market, despite South Africa’s weak GDP. Many South African companies are borrowing domestically to expand in the rest of Africa. Standard Bank opened a representative office in Côte d’Ivoire last November to extend its services across Francophone Africa. Early this year the bank agreed to sell a 60% stake in its London-based global markets business to Industrial and Commercial Bank of China. Standard Bank plans to redeploy the proceeds
in Africa.

—Sim Tshabalala, Ben Kruger, joint CEOs
www.standardbank.com

SSgA has more than $2.4 trillion of assets under management. Perhaps its best-known product is the S&P 500 SPDR, an exchange-traded fund created in partnership with the American Stock Exchange in 1993. SSgA now offers a broad range of ETFs and was the first to offer ETFs based on gold, international real estate, fixed income and various industry sectors. The SPDR Euro Stoxx Small Cap ETF, providing access to small companies across the eurozone, began trading on the NYSE Arca in June. SSgA creates investment strategies for corporations, foundations, governments and religious and educational organizations. It was one of the first emerging-markets index managers and currently manages more than $62 billion in EM assets.

—Scott Powers, president and CEO
www.ssga.com

BNY Mellon, the world’s largest custody bank, had assets under custody and/or administration of $28.5 trillion as of June 30, 2014, an increase of 9% from a year earlier, mainly as a result of higher market values. BNY Mellon offers services in more than 100 markets in 35 countries. The bank is the world’s largest depository for American and global depositary receipts. In May, BNY Mellon was named global custodian by the Connecticut State Treasurer’s Office for the $28.5 billion Connecticut public pension plans and trusts. In June it was appointed by the State Pension Fund of Finland to provide global custody for its direct equity and fixed-income instruments, which are valued at about $10 billion.

—Gerald Hassell, chairman and CEO
www.bnymellon.com

In a stark indication of the formidable progress that Bank of America Merrill Lynch has made since its creation through the controversial merger of Bank of America and Merrill Lynch in 2008, this Wall Street titan is leveraging the strength of Bank of America’s balance sheet and the legendary talent of Merrill’s standing army of brokers to steal market share from banks of all sizes and domiciles around the world. As a result the bank earned 25% more in investment banking fees in 2013 than the year before, raking in $5.7 billion in fees from equity, debt and mergers & acquisition deals, ranking second only to J.P. Morgan, according to Dealogic.

—Christian Meissner, head of global corporate and investment banking
www.bankofamerica.com

With more than 20,000 transaction service employees in 90-plus countries, Citi is a global leader in cash management services. Citi’s Treasury and Trade Solutions unit serves 65,000 corporations, including 97% of the top global companies. Last year the bank processed an average of $3 trillion in payments value per day. “Our teams have worked diligently to ensure our solutions are the most relevant and sophisticated in the market,” says Ebru Pakcan, global head of payments, treasury & trade solutions at Citi. “Coupling our innovative offerings with our consultative advisory approach allows Citi to remain at the forefront of the market.”

—Ebru Pakcan, global head, payments, treasury & trade solutions
www.icg.citi.com

Citi’s operational scale and global network are augmented by the bank’s long-standing relationships with official export credit agencies, development finance institutions and multilateral agencies. The CitiDirect online banking system enables clients to manage trade payables and receivables and to conduct other trade-related transactions. Citi’s Integrated Freight Processing portal simplifies the management of transportation invoices and payments. All invoices are converted into electronic data and are matched against bills of lading or purchase orders. This helps to resolve disputes and execute payments on a timely basis.

—John Ahearn, managing director and global head of trade
www.icg.cit.com

At a time when regulatory changes were causing dealers to reduce inventory, Deutsche Bank foresaw the need to price risk accurately and quickly. It combined its fixed-income and currency operations and established a platform for cross-asset flow trading. As a result its options volume expanded rapidly. With more of its businesses using the same system, Deutsche Bank has automated more processes, including pretrade credit checks. The bank also installed a system that enables traders to price the cost of collateral more quickly. Its Autobahn Corporate Treasury platform enables multinationals to manage the FX operations of their worldwide subsidiaries from a single location.

—Zar Amrolia and Richard Herman, co-heads of fixed-income and currency trading
www.db.com

Citi has the largest proprietary custody network in the industry, covering 62 markets worldwide. The most recent country added was Bulgaria, as part of Citi’s purchase of ING’s custody assets in Central and Eastern Europe. Lee Waite, global head of direct custody and clearing at Citi, says: “On a relative scale, Citi’s custody business is doing very well. Pricing pressures and expenditures to keep current with new regulations are a drain on resources. However, because of the size of Citi’s footprint, we can spread out that investment globally.” As Europe moves toward Target2-Securities Settling, a common settlement platform, subcustodians will lose settlement revenue, Waite says. But if harmonized settlement makes it easier and cheaper to invest in Europe, trading volumes should increase, he adds.

—Lee Waite, global head of direct custody and clearing
www.citigroup.com

Although global reach and geographical spread are important attributes in an SCF provider worthy of winning this category, this year we have placed greater emphasis on factors such as a bank’s ability to service the supply chain end to end with a wide range of financing solutions. Standard Chartered remains committed to emerging markets at a time when other banks are withdrawing from or unwilling to do business in areas where the need for financing is greatest. By focusing on the buyer-supplier relationship as a whole, the bank gets involved earlier in the supply chain than many of its peers, allowing it to offer a wide range of financing solutions, such as structured warehouse finance, vendor prepay, preshipment finance, postshipment preacceptance and postshipment acceptance, including buyer or distribution finance.

—Michael Vrontamitis, head of trade, product management, transaction banking
www.icg.citi.com

REGIONAL WINNERS
BEST BANK IN NORTH AMERICA
Bank of America

After winding down most of its liabilities from the financial crisis, Bank of America is charting a new course for future growth that features wealth management and corporate banking services. Thomas Montag, recently named sole chief operating officer, helped turn the bank into an investment banking power. The company has a high gross profit margin, although litigation expenses have eaten into reported earnings. The global wealth and investment management division reported record revenue of $4.6 billion, and record client balances of $2.5 trillion in the second quarter. “The economy continues to strengthen, and our customers and clients are doing more business with us,” says Brian Moynihan, president and CEO. “Among other positive indicators, consumers are spending more, brokerage assets are up by double digits, and our corporate clients are increasingly turning to us to help finance business expansion and merger activity.”

—Brian Moynihan, president and CEO
www.bankofamerica.com

The banking arm of ING, the biggest Dutch financial services company, beat earnings forecasts in the second quarter, with an increase of 11.4% from the restated earnings of the same period a year earlier. The results were the first since ING became a pure bank after divesting some of its insurance holdings. Last year ING’s performance improved across the board. Outside its Benelux home markets, ING-DiBa is the fastest-growing bank in Germany and now third by the number of customers. In commercial banking, ING enjoys a market-leading franchise in the Benelux, where it is leading arranger (MLA) and bookrunner by both number of deals and value. ING is ahead of the curve in responding to the switch among customers to online and mobile channels. CEO Ralph Hamers says: “We are very proud of the progress that we have made with the restructuring over the past several years, which has brought ING Group well into the end stage of our transformation.”

—Ralph Hamers, CEO
www.ing.com

As the largest and most diversified bank in the Nordic region—where it is market leader or runner-up in both retail and corporate banking in all four main economies—Nordea has turned in a strong and consistent performance. CEO Christian Clausen foresees “a prolonged period of low-growth environment and lower-than-normal interest rates.” His response to lower consumer activity is to “expand and accelerate our existing cost-efficiency program,” thereby “enabling us to adjust our capacity and maintain our position as a strong bank.” Although net interest and total operating income were down 1% last year, there was an 18% drop in net loan losses, which fed through to the bottom line. Clausen says the bank has more than doubled its capital base since 2006.

—Christian Clausen, president and group CEO
www.nordea.com

Austrian banks, including RBI, had their debt ratings cut in June by Moody’s Investors Service. RBI’s consolidated profit of $770 million last year was built around a 7.4% increase in net interest income and an underlying 8.2% rise in operating income. CEO Karl Sevelda notes that the “significant increase in our operating result again proved the strength of our business model.” Stripping out one-off benefits from bond sales and the buyback of hybrid capital booked in 2012, RBI’s 2013 operating result reflected a 17% improvement over the previous year. Total assets declined slightly in euro terms. Sevelda says that “going forward, we will optimize our business model by focusing on the most attractive markets in the CEE, and by improving our efficiency.”

—Karl Sevelda, CEO
www.rbinternational.com

Despite a substantial decline in profitability in three of the bank’s key Latin American markets—Brazil, Mexico and Chile—Banco Santander garnered most of its 2013 profits of €4.4 billion ($5.7 billion), 90.5% year-on-year increase, in the region. Volumes and profits grew by double digits in other markets throughout the region, driven primarily by net interest and fee income. Santander continues to hold important leadership positions in all of the Latin American markets in which it operates, serving 44 million customers through a network of more than 6,000 branches. The bank’s chairman says it is poised for further growth.

—Ana Botín, chairman
www.santander.com

DBS is taking its very successful domestic business model and risk management skills beyond its borders to challenge the traditional multinational banking heavyweights. It has built its overseas network of banks organically, focusing on challenging sectors such as small and medium-size enterprise lending, wealth management and trade and transaction services. Meanwhile, its risk management skills resulted in a low 1.1% ratio of nonperforming loans overall for the group at the end of 2013. DBS’s investment banking unit has built an outstanding reputation, not only in Singapore but also in Hong Kong, where it worked on all of the top 10 deals last year. The bank posted record earnings in the first half of 2014, up 9% from a year earlier.

—Piyush Gupta, CEO and director of DBS Group
www.dbs.com

Arab Bank operates the largest banking network in the Arab world and generates 75% of its income outside of its home market of Jordan. The bank’s first-half 2014 earnings rose 7% from the same period a year earlier to $415 million. Nemeh Sabbagh, CEO, says the bank recorded an increase of 3% in net interest income and 7% in commissions and that the bank continues to maintain comfortable liquidity ratios as a strategic goal. Arab Bank does a growing business with Asian corporations in the Middle East. It also has a strong presence in the project and structured finance markets. In the retail sector, Arab Bank is introducing new delivery channels and expanding branch networks in countries such as Egypt, Tunisia and Palestine.

—Nemeh Sabbagh, CEO
www.arabbank.com

South Africa’s Standard Bank has a clearly defined strategy of simplifying its business and narrowing its focus to the African continent. Sim Tshabalala, joint CEO, says: “We continue to use our South African scale, as well as our access to pools of capital around the world, to provide products and services that deliver value to our clients across the continent.” Standard Bank sold a controlling stake in its London-based global markets business to Industrial and Commercial Bank of China early this year. Meanwhile, Standard Bank took an $80 million hit from its exposure to an aluminum financing fraud in China’s Qingdao port, which flattened the bank’s earnings in the first half of 2014.

—Sim Tshabalala, Ben Kruger, joint CEOs
www.standardbank.co.za