Published September 20, 2008

Losing balance

US banks tumble down the charts but American capital markets keep their clout

By TEH HOOI LING
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IT'S a tectonic shift in the world of finance. Following the destruction of some US$1.2 trillion of capital in the last 20 months, the once mighty financial sector of the United States is now severely decimated. Coming to the fore are some Asian banks, which are now perched atop the list of the world's largest financial institutions.

As recently as last year, four of the world's five largest financial institutions in terms of market capitalisation were US companies.

Today only two remain - Bank of America and JPMorgan Chase - in fourth and fifth positions respectively. Citigroup used to lay claim to the title of 'the world's largest bank' as recently as last year.

Today, its market capitalisation of US$90 billion is only one-third of what it used to be in January 2007. Still, it remains among the world's 10 largest financial institutions - at ninth position - albeit with significantly higher foreign ownership.

Insurer AIG commanded a market cap of US$186 billion last year. Today, its size has been cut down to just US$36 billion.

The world's largest financial institutions at the moment are Industrial and Commercial Bank of China, worth some US$182 billion, HSBC Holdings (US$175 billion) and China Construction Bank (US$141 billion).

Does the current market upheaval mark the end of the US as the capital centre of the world?

Not likely, at least for the next few years, market observers said. 'No doubt in the last few years a lot of wealth has been created in the Middle East and Asia,' said Jan Lambregts, Rabobank's head of research in Asia. 'But the capital markets in these parts of the world are still 15 years behind the US.

'So although there is a lot of wealth, there are not a lot of quality assets to store this wealth in.' Once the problems are worked through, the money will return to the US, said Mr Lambregts. 'There's a lot of depth in the US market.'

Here is one piece of evidence in support of that argument. Year to date, the turmoil in the US markets sent shivers across the world and wiped out a whopping US$17 trillion from global equities.

But curiously, the US - despite being in the eye of the storm - accounted for only 19 per cent of that loss of shareholders' wealth, figures from Bloomberg showed. It was the emerging markets like China and India, and to a lesser extent Europe, that suffered the brunt of the drubbing.

And according to Merrill Lynch, emerging markets' long-only equity funds saw almost US$30 billions of outflow in the past 15 weeks alone. There was outflow across all regions and most countries this week. US equity funds, on the other hand, saw a hefty US$50 billion inflow during the same period.

Michael Petronella, president of Dow Jones Indexes who was in town yesterday, shares the same view. 'I don't think just because the crisis began in the US, it signals the end of its dominance in the capital markets. We've had other capital market disruptions in other parts of the world. This isn't the first time, and it will not be the last.

'Yes, a lot of wealth has been destroyed. But a tremendous amount of capital has been created in the last few years as well. This is just a correction of that. We had the Internet boom and the housing boom which created a lot of capital and destroyed a lot of capital as well.

'If you look at the long-term growth chart and you normalise it, it probably doesn't look too bad.

'Just like indexes, we have to do rebalancing every now and then. The world is just rebalancing itself,' he said.

Well perhaps in the short to medium term, the rebalancing will still see Wall Street continuing to be the world's money magnet. But ultimately, the centre of gravity will steadily shift east, predicts veteran fund manager Hugh Young of Aberdeen Asset Management, as the capital markets in these parts of the world develop and mature.

Meanwhile in the aftermath of the current crisis, an increasing portion of US financial institutions has fallen into foreign hands. Will there be a nationalistic backlash sometime in the future?

Noted Mr Lambregts: 'Until recently, there was a lot of debate about the motives of sovereign wealth funds. There's a whole lot less criticism now. People realise that the capital from these funds is required.'

The criticisms may resurface in the future, but he reckoned that as long as the foreign holdings are in the 10 to 20 per cent range, there won't be any big outcry.

Thus far, Asians financial banks have virtually moved up the ranks simply by staying put. And there are now some concerns that with the world economy slowing and asset prices falling, the write-offs will be coming for Asian banks, especially those from the China. For one thing, the behemoths in China have not gone through a down-cycle in their current form. Questions have to be asked on how they will handle it, observers said.

As for Singapore banks, UOB now ranks as the 80th largest bank in the world, according to Bloomberg's ranking. That's up some 20 spots from just a month ago. DBS is in the 86th position and OCBC in 107th.

Kim Eng, however, in a report yesterday warned that while it admires Singapore banks' superior asset quality and balance sheet strength, a drastic slowdown in earnings momentum is unavoidable. The banks' stock prices could fall by a further 18 per cent over the next 12 months in its worst case scenario, it added.

One thing is for sure, the write-downs and the cut-down in size of Asian financial outfits will not be of the magnitude seen in the US. Although things are still in a flux, a new landscape is emerging.