As banks in the so-called BRIC countries - Brazil, Russia, India, and China - become larger and more competitive, a few could emerge as challengers to leading Western players, says a new report by The Boston Consulting Group (BCG).


Three Chinese companies now rank among the world's ten largest banks, all with market capitalizations of well over $100 billion. China's ICBC holds the number-two spot after raising $21.9 billion in an IPO last year. Bank of China, which also went public last year, ranks sixth, and China Construction Bank, which first issued shares in 2005, ranks seventh.

In addition to becoming larger, banks in emerging markets have become more competitive, greatly outperforming Western banks over the past five years. The banking industry in China has earned particularly strong returns for investors, while Russia's Sberbank boasts a five-year shareholder return (adjusted for risk and local market influences) of 12.9 percent per year-the highest of any bank.

"Banks in the BRIC countries will continue to grow much faster than their Western peers and a few could emerge as global challengers over the next five to ten years," said Tjun Tang, one of the report's coauthors and a BCG partner. He predicted that BRIC-country banking revenues will increase by an average of 8 percent, on an inflation-adjusted basis, each year until 2015. "But developing markets are also more volatile, and if confidence goes down, valuations can change very quickly."

The rapid rise of banks in BRIC countries is just one of the trends highlighted in Bigger, Better Banking, BCG's fifth annual study of shareholder value creation in the banking industry. Like the previous reports, it provides an overview of the state of the industry - reviewing the results of the top performers by country, segment, and size - and analyzes the drivers of value creation.

The report covers a large sample of banks that represents more than 80 percent of the total market capitalization of the global banking industry. It also provides a performance ranking of the 100 largest banks. Among the report's other key findings:

- The total market cap of the banking industry grew 25.5 percent to an
all-time high of $8.1 trillion last year

- The industry's average total shareholder return (TSR) climbed to 25.6
percent, up from 13.8 percent in 2005

- Return on equity increased to 15.9 percent, while the cost of equity
remained at 9.5 percent, resulting in a record profitability spread of
6.4 percentage points

- Continued equity growth was the largest driver of value creation-in the short as well as long term

- In developed markets, the banking industries in Canada, Australia, and France were at or near the top of the five-year performance ranking for the fourth consecutive year

- Investment and universal banks were the strongest segments for one-year as well as five-year TSR rankings

With banks facing the challenge of topping record profitability and robust growth, the report explores new options for creating value-in particular, opportunities to leverage investments in risk management.

"Few banks have found a way to link the benefits of risk management investments-for example, increased transparency and more accurate risk assessment-to management decisions," said Gerold Grasshoff, another coauthor of the report and a BCG partner. "Risk management should, in fact, be seen as a business investment that can unlock new possibilities for profitability or growth."