Europe And Asia Home To Weakest Global Banks

by: Weiss Ratings

At a time when every news channel and talk show is devoted to reporting worldwide market moves, it's impossible to ignore the global crisis whirling around us. We're afraid to blink - we might miss something. We moan about low interest rates and investment losses. And yet, we also don't want rising interest rates to cut off economic recovery.

The U.S. and many world nations are stuck between a rock and a hard place - balance the budget or aide recovery - can't seem to have both. And many of the world's banks are being tossed in the maelstrom. Some are suffering from investments in sovereign debt, burst real estate bubbles, high unemployment levels and the like.

And our savings and investments, purchasing power, healthcare options, retirement time frames, social safety nets, the monetary stability of the corporations we work for - big things - are all connected right back to the financial infrastructure and ultimately the institutions we bank with. We're scared about what the future holds. And we should be.

This fast paced, politically fraught financial zoo isn't going to make it easy to keep our money safe. Or, make it easy to find opportunities for profit. If only we had a crystal ball... we could recognize the weak from the strong... we could find some market flaw, exploit it and enjoy the financial bonanza.

Instead, we are left to sift through a quagmire of information. And, to add to our anxiety, institutions we believed healthy announce losses or outright failure on a regular basis. It's hard to know which way to turn.

But before we give into "overwhelming" anxiety, let's take a step back and really look at what's going on. Yes, globally financial institutions are struggling to regain stability. And as always, there are the good, the bad, and the... ugly. So, which banks are which and where in tarnation are they?

We found the world's weakest banks concentrated in Europe and Asia. And these weak banks are also alarmingly among the largest in the world. The U.S. can claim one of the largest on this infamous list too, the well-known Bank of America. Perhaps "too big to fail" means too big to manage in adverse times... maybe in good times too... we'll have to watch and see.

This demographic concentration of weak banks underscores the severity of Europe's financial crisis, despite (or perhaps because of - depending on which side of the economic strategy fence you're on) imposed austerity measures. And, with fears over a euro breakup mounting, European banks could easily face a new and more tumultuous round of financial troubles.

The strongest financial institutions are based in Latin America, the Middle East and North America. Generally smaller in size, primarily headquartered in nations undergoing rapid growth, these institutions have largely bypassed the recurring debt crisis of recent years.

In initiating coverage of 206 of the world's largest1 financial institutions, Weiss found that 75, or 42 percent, of the weakest banks - those rated D+ or lower - were based in Portugal, Italy, Ireland, Greece, and Spain (often referred to as PIIGS countries), France and Germany. In addition, 50 percent of the 32 Japanese banks evaluated by Weiss merited a rating of D+ or lower. The U.S. is home to 17 of the largest banks and, despite some challenges, 13 are rated "Good" or "Fair." The few remaining large U.S. banks are considered vulnerable and weak.

Large global banks receiving a Weiss Financial Strength Rating of D+ (Weak) or lower are:

Click to enlargeWeakest global banks table

Germany's Deutsche Bank (NYSE:DB), the largest bank in the world with total assets of $2.8 trillion as of December 31, 2011, received a Weiss rating of D (Weak) due to its capital position and poor profitability. Its low 1.8 percent tangible common equity ratio, a measure of capital, is just one-fifth the industry average of 8.4 percent. In addition, Deutsche Bank earned a return on assets of only 0.1 percent, a fraction of the industry average of 0.9 percent. Both figures suggest that the bank has a significantly higher probability of future financial difficulties.

The largest U.S.-based global bank considered weak by Weiss is Bank of America (NYSE:BAC), the tenth largest bank in the world with assets of $2.1 trillion. Bank of America reported return on equity of -1.5 percent for 2011, which is well below the industry average of 10 percent. This reduced profitability due to prior bad loans and restructuring of nonperforming businesses is the primary factor in determining the bank's D+ rating.

By contrast, Weiss found that the strongest global banks were headquartered in the emerging markets of Latin America and the Middle East and are generally smaller in size. With more focused lending and investing strategies, these banks, in nations undergoing industrialization, some in resource-rich countries, seem to have been able to remain stable and prosper despite the global economic crises that began in 2008.

Large global banks receiving a Weiss Financial Strength Rating of B+ (Good) or better are:

Weakest global banks table

The two highest-rated banks in the world, Qatar National Bank (QNBK) and Al Rajhi Bank (RJHI.AB) are located in the Middle East. Based on solid capital positions and strong financial results, both banks earned a Weiss Financial Strength Rating of A (Excellent). Qatar National Bank, with $82.9 in assets reported 20.9 percent in Tier 1 capital, almost double the average of 11.5 percent. Non-performing loans represent only 4.6 percent of Qatar's core capital, an impressive achievement compared to the average of 31.5 percent. The bank also enjoyed a return on assets of 2.3 percent, more than double the average of 0.9 percent.

Similarly, Al Rajhi Bank has strong capital, profitability and liquidity. It has a high risk-based capital ratio of 18.9 percent. Both its return on assets of 3.2 percent and operating income to assets of 3.3 percent are well above average. And, at 9.66, its cash and equivalents as a percent of total liabilities is almost double the average.

Weiss Ratings has added coverage of more than 200 global banks, issuing ratings on the world's largest bank holding companies. The methodology used to rate global banks is the same quantitative analysis that Weiss applies to domestic institutions, evaluating each of five major components of a bank's finances - capital, asset quality, earnings, liquidity and stability - to determine an overall Weiss Financial Strength Rating, which ranges from A (Excellent) to E (Very Weak).

Investors can trade these global stocks in the U.S. under the noted symbol or on their primary exchange using the foreign stock symbol. The Weiss Global Financial Strength Ratings include the primary exchange and trading symbol. And, if you're interested in Weiss Ratings' perspective on global banks that might make a good investment play, take a look at Undervalued Global Bank Stocks.

1 Assets of $50 billion or more

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.