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Scramble at the top

Shifts in the industry’s league table are the result of investors’ changing views.

To understand an industry, one must inevitably understand its biggest and most valuable firms. The world’s 30 most valuable banks represent close to half of the industry’s total value and 60 percent of total banking revenues. The total market capitalization of these banks was about $3.6 trillion in May 2017. That is up from 2000, when top 30 banks (a different set) commanded $1.6 trillion of market cap. The figure grew by about 7 percent between 2000 and 2009, then slowed to 3 percent growth in the past eight years, more or less in line with broader market growth.

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Yet the price-to-book ratio (P/B) multiples for the top 30 banks decreased significantly from 2000, when it was above two. The ratio fell to 1.7 in 2009 and decreased further at the depths of the crisis, reaching 1.1 in the first quarter of 2017. This is only 0.1 higher than the global average. The market sees limited current potential for banks to create significant value. To be sure, $3 trillion of market cap is an enormous sum—but it is also the value the market places on just the five largest tech companies.

If we look more closely, we can see that market cap is also a good (though volatile) barometer of banking trends and expectations for the world’s major regions. We have seen the following significant changes between 2000 and 2009 and again after the crisis (exhibit):

  • Western Europe’s banks played a major role in 2000, accounting for one-third of the top 30 banks’ market capitalization. Their decline is dramatically visible; the comparable figure is just 6 percent today. Several British, French, German, Italian, and Swiss banks in 2009’s top 30 are no longer on the list. The decline cannot be explained solely by the continent’s enduringly weak economy. It comes from the combination of three things: changes in earnings and capital, crisis-driven write-downs or divestments, and changes in P/B multiples. These banks’ collective P/B multiple declined (from 2.3 in 2000 to 0.6 in the first quarter of 2017), showing that investors’ concerns extend to the institutions themselves. Those banks that have stayed in the top 30 have new strategies: they are concentrating on cost efficiency and digital-banking opportunities.
  • Three of the banks on the top 30 list are headquartered in Western Europe but are truly international banks, with two-thirds of their revenues coming from international activities, especially in Asia and Latin America. That diversity has helped them a bit; their shares have not declined as dramatically as those other European institutions, and all three banks have kept their place in the top 30. But they have not fared as well as investors expected in 2000 and have lost some market share.
  • Most of China’s banks went public after 2000, and as they did, the region’s share of the top 30 grew naturally. Over the past eight years, Chinese banks’ share has been stable, at about one-quarter of that of the top 30. Interestingly, market capitalization has grown faster in China than in other regions, such as the United States, but the P/B has fallen and is now 0.8.
  • Representing the other emerging markets are a bank apiece from Brazil, India, and Russia, the same number as in 2000. Japan places one bank in the top 30; it has a low but stable share.
  • Australian and Canadian banks’ share grew from 3 percent in 2000 to 17 percent this year. This share seems especially remarkable considering population (both countries have fewer people than Poland) and nominal GDP of the two countries (together, only 4 percent of global GDP). Canadian banks are moving deeper into the US market; Australia’s have some interest in other Asia–Pacific markets, but most of its revenues and strong valuation (P/B above 1.5) are connected to their domestic market.
  • US banks had more than 40 percent of the top 30 market cap in 2000. Their share dropped significantly in the financial crisis but bounced back in the past few years. Most of the US banks in the top 30 grew their exposure in the domestic market; P/B is higher (1.2) than in many other markets but not dramatically so. Rather, it is the huge size of the market that attracts investors’ attention.

The top league of global banks has changed dramatically in the past 17 years, even more than regional banking trends would explain. New market challenges and digital transformation are accelerating. We could see similar radical changes in the coming decade. Making the right strategic choices now can hugely influence banks’ ability to stay ahead of the shifts.

Detailed views on the economics of banking are available by request from McKinsey Panorama Global Banking Pools. Should you want more details or have any questions, Panorama’s Helpdesk (panorama@McKinsey.com) is happy to provide methodological and analytical assistance.