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THEBOSTONCONSULTINGGROUPJune2003CreatingValueinBankingForPublicReleasePleasenotethatthisisanabbreviatedandcondensedversio[e-mail]GBCGPage2TABLEOFCONTENTSPREFACE3ACKNOWLEDGMENTS3NOTESTOTHEREADER4BANKINGIN2002—EXECUTIVESUMMARY5IDENTIFYINGTHETOPPERFORMERS7TheDifferentFacesofStockMarketPerformance7GlobalRanking9APPENDIX:SAMPLE11SampleandData11CREATINGVALUEINBANKINGBCGPage3PREFACESuperiorvaluecreationandcompetitiveadvantagearethegoalsofmanagement.TheBostonCon-sultingGroup(BCG)hasformanyyearsanalyzedthedriversofvaluecreationforclientsacrossin-dustries.Inrecentyears,wehavepublishedannualstudiestoanalyzetheworld’stopperformingcompaniestobuildourunderstandingofsuchleadingplayers.Bankingischangingrapidlyastheindustryconsolidatesandasfinancialmarketsbecomemoreglobalandcompetitive.Rigorousconcentrationonprofitabilityandgrowtharemoreimportantthaneverforseniorfinancialexecutives.Intoday’suncertainmarkets,itiscriticalforbankstounderstandandmanagemarketexpectations,andtomanagetheportfolioofbusinessesaswellaspossible.Thisyear,forthefirsttime,inresponsetorequestsfromfinancialservicesclients,wearepublishingCreatingValueinBanking,whichanalyzesshareholdervaluecreationinthebankingindustry.Weplantopublishthisstudyannually,andexpecttobroadenitnextyeartocovertheinsuranceindustry.ACKNOWLEDGMENTSWe’dliketothanktheseveralpeople—includingmanyfromtheFinancialServicesandCorporateDevelopmentpractices—involvedinpreparingthisreport,inparticulartheauthorswouldliketothank:GeroldGrasshoff,ThomasHerbeck,andRobertLauter.WalterSinnRanuDayalDavidPitmanCREATINGVALUEINBANKINGBCGPage4NOTESTOTHEREADERAbouttheAuthorsWalterSinnisaVicePresidentandDirectorintheFrankfurtofficeofTheBostonConsultingGroup.RanuDayalisaVicePresidentandDirectorinthefirm’sNewYorkoffice.DavidPitmanisaVicePresident-electinBCG’sSydneyoffice.ForFurtherInformationFormoreinformationonthereportorBCG’sgeneralcapabilitiesforvaluemanagementinfinancialservices,pleasecontact:EuropeAmericasAsia-PacificWalterSinnRanuDayalDavidPitmanVicePresidentandDirectorVicePresidentandDirectorVicePresident-electBCGFrankfurtBCG[e-mail]@[e-mail]ThroughMergersinLeanTimes—TheHiddenPowerofMergersandAcquisitionsinPeriodsofBelow-AverageEconomicGrowth,BCGStudy2003SucceedinUncertainTimes—AGlobalStudyofHowToday’sTopCorporationsCanGenerateValueTomorrow,BCG’sValueCreatorReport2002BreakupsAreNottheOnlySolution,BCG’sConglomeratesReport2002DealingwithInvestors’Expectations—AGlobalStudyofCompanyValuationsandTheirStrate-gicImplications,BCG’sValueCreatorReport2001NewPerspectivesonValueCreation—AStudyoftheWorld’sTopPerformers,BCG’sValueCreatorReport2000DisclaimerTheBostonConsultingGroupisageneralmanagementconsultingfirmthatisaleaderinbusinessstrategy.Foundedin1963,thefirmnowoperates58officesin36countries.AlthoughBCGhasasubstantialfinancial-servicesconsultingbusiness,thisreport,whichweplantopublishannually,isnotintendedtoprovideinvestmentadvicetoanyparty.Anyinvestmentdecisionshouldbemadeonlyafterindependentreviewandanalysis.Forfurtherinformation,[e-mail]GPage5BANKINGIN2002—EXECUTIVESUMMARYBankslostvaluein2002,buttheylostlessthantheoverallmarketdid.Overall,shareholderslostabout$350billioninmarketcapitalizationinthebankingindustryin2002.Totalreturnsforshareholderswereminus11per-cent—whichneverthelessstilloutperformedtheoverallstockmarket,whereawell-diversifiedshareholderlost17percentofinvestmentonaver-age.Amongnations,GermanyandSwitzerlandwerehithardest.Amongsegments,assetmanagement,investmentbanking,andtransactionbankingweretheworstperformers.Consolidationinbankingcontinues.Thetenlargestcompaniesraisedtheirshareinworldwidemarketcapitalizationfrom19percentin1998to24percentin2002,mainlythroughmergersandacquisitions.Today’slarg-estthreebanks(Citigroup,BankofAmerica,andHSBCHoldings)haveincreasedtheirmarketcaponaverageby25percentperyear,reachingatotalmarketcapofmorethan$100billioneach.Expectationpremiumsremainhighevenafterthemarketdecline.Inourview,recentnegativeshareholderreturnswereprimarilytheresultofchangesinmarketexpectationsratherthandeterioratingfundamentals.BCGvaluationmodelssuggestthatbytheendof2002theexpectationpre-miumwas31percent,andthereforestillstronglypositive.Wedefineexpectationpremiumastheshareofmarketcapitalizationnotexplainedbystandardizedfuturecash-flowprojectionsbasedoncurrentfundamentals.Profitabilityimprovedin2002despitedifficultmarketconditions.Av-eragereturnonequity(ROE)aftertaximprovedfrom14.3percentin2001to16.5percentin2002.However,costofequityincreasedtoo,leavingtheeconomicspreadbetweenROEandthecostofequityunchangedover2002.Onlyafewcountriesexperiencedarealprofitabilitysqueezein2002(suchasGermanywithanaverageROEbelow1percentforlistedbanks).Glob-ally,76percentofeq