Giants on their knees

The global financial crisis has cut the world's top banks down to size

By Zhen MIng


GIANTS are part of our folklore, so let's start with a folk tale.

Once upon a time in France, there was a 31-year-old derivatives trader by the name of Jerome Kerviel.

He worked for a giant bank named Societe Generale. The bank was 150 years old.

Bored by his daily routine (in our folk tale) - and allegedly pressured by mounting losses (in real life) - Jerome decided he would make unauthorised bets on the stock market.

And just like the magician's apprentice, who could not stop the multiplying brooms from nearly drowning him, Jerome was soon engulfed in an ocean of debt - his bank's, not his.

This debacle eventually cost his bank almost 5 billion euros ($9.6 billion).

His supervisors later said they had had no idea what he was up to.

This story is true and it happened in January. And it had an important lesson to the heads of banks - pay attention and don't get greedy.

Unfortunately, this lesson went unheeded. And now, after the severe global credit crunch, which was partly fuelled by greed, the once giant banks of Europe and the US are reeling.

Societe Generale and at least eight other equally well-known financial institutions have endured a drastic plunge in market values.

To date, according to The Boston Consulting Group, the losses incurred by all banks have translated into an ocean of shareholder red ink totalling nearly US$3trillion (about $4.6 billion).

Since Europe's loss - and America's, too - is now Asia's gain, expect a so-called 'new world order' for banks.

With Asia now boasting four of the world's 10 biggest banks by market value (and with three of the top five hailing from China), the Chinese have, in fact, become the banking world's new 'masters of the universe'.

By way of comparison, Bank of America (BofA), the world's second largest bank, is a distant also-ran behind Industrial & Commercial Bank of China (ICBC), the world's No 1 bank. (In market value terms, BofA is only 70 per cent the size of ICBC.)

As recently as 2003, at least half of the banks ranked as the world's top 10 were American (without a single Asian rival), according to data compiled by Bloomberg.

Now, there are four Asian and four US banks in this exclusive Top 10 Club.

More changes

And, oh, what a great difference barely a couple of years can make.

Less than 21 months ago, Citigroup was still the world's biggest bank by market value. Back then, ICBC was just into its fourth month as a publicly-traded company.

Not anymore. The US sub-prime mortgage market collapse has wiped out tens of billions of dollars off Citigroup's market value while ICBC's fortunes have held steady.

Through Friday, Citigroup shares had fallen 68 per cent this year, leaving the bank with a market worth of only US$52billion - barely twice the US$25 billion it received from the US Treasury. (Citigroup was still worth US$82 billion back in late October.)

Not surprisingly, Citigroup said Monday that it will have to cut another 52,000 jobs by early next year - this, on top of the 23,000 already eliminated so far this year.

But this latest retrenchment will still leave the 197-year-old bank with about 300,000 jobs worldwide (down 20 per cent from end-2007).

The good news: Citi Singapore, one of the largest banking sector employers locally, will face only 'modest headcount reductions'.

But if the job cuts were proportional, as many as 1,300 Citibankers here could be out of work - as compared to the 900 laid off worldwide by DBS Group.

Speaking of DBS Group, the plunging stock market in October has done 'the once unthinkable' - on 20 Oct 2008, it made South-east Asia's once largest bank the smallest of the three local banks by market value.

This swift reversal of fortunes allowed OCBC Bank to briefly overtake DBS Group in market value - the first time this has happened in seven years. (As of Tuesday, DBS Group was slightly ahead of OCBC Bank.)

So don't count on the volatility as being over yet for global banking.

With one in 10 US mortgages now 'delinquent' or 'in foreclosure', and with house prices still falling further, such 'toxic waste' will surely continue to burn holes in bank balance sheets everywhere.

Not the kind of news you'll want to hear every day. But not the kind you can well afford to ignore either.


Source: The New Paper, Thu 20 Nov 2008