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Banking Outperformed Almost All Other Industries in 2003
NEW YORK -- The banking industry increased its stock market value by more than $1.3 trillion in 2003, driven by improved fundamental performance and higher market expectations, according to "Winners in the Age of the Titans: Creating Value in Banking 2004," a new report from The Boston Consulting Group.Banks' total shareholder return was 45% -- substantially above shareholder returns for the overall market. The stock market appreciation of more than $1.3 trillion in banks' total market capitalization was backed by improved fundamental performance.Banks' average after-tax return on equity increased from 13% to 14.4% from 2002 to 2003, while their organic growth rate almost doubled to 7%. Investment banking outperformed other segments.With an average annual shareholder return of 13% between 1999 and 2003 -- and one of 53% in 2003 -- investment banking was the best- performing banking business. Successful cost-cutting programs, strong fixed- income activity, and expectations for the recovery of equity and advisory businesses underpinned this strong performance.Top performers combined above-average profitability of 18% with strong annual growth rates of 14%. Two of the four global banking titans (Citigroup, HSBC, JP Morgan Chase and Bank of America) ranked among the top performers in 2003. Lehman, HSBC, and Citigroup led the five year performance rankings, measured by risk-adjusted relative total shareholder return (RRTSR), a performance measure developed by BCG to measure companies' true capital market performance. Many successful players have now completed efficiency programs. For them, growth is now the critical ingredient for future success."Exceptional performers find ways to overcome the constraints of their domestic markets," says Ranu Dayal, one of the report's authors. "While there are significant differences in performance across countries, there are high performers in all the major markets."Only two countries, Germany and Japan, experienced a significant profitability squeeze in 2003, with banks there operating on average with negative ROE in 2003.Consolidation in global banking is accelerating. The world's five largest financial institutions raised their market cap by 18% a year between 1999 and 2003, increasing their share of worldwide bank market capitalization from 13% in 1999 to more than 16% in 2003. The megamergers of Bank of America/FleetBoston and JP Morgan Chase/Bank One have created two new banking titans. They join Citigroup and HSBC as the biggest banks in the world with an average size of $180 billion. Of course, the titans pose huge challenges for all players. And, all significant players need to think through their strategies and responses to the changed landscape.The study offers several important implications for senior bank executives. Winners allocate their capital carefully and strike a good balance between profitability and growth. They also manage market expectations exceptionally well. While some of the titans have shown outstanding performance, BCG believes that it is success in chosen businesses rather than size alone that brings success. Focused growth in selected businesses is a hallmark of success across banks of varying sizes.The Boston Consulting Group is a general management consulting firm with more than 60 offices in 37 countries.Visit The Boston Consulting Group: www.bcg.com"