Global Banking System Analysis: 8 Countries Compared

Introduction and Economic Overview

Every country has a different level of financial development. The World Bank uses four measures of banking development: depth, access, efficiency, and stability. An international banking conglomerate considering expansion will want to understand a country's local banking conditions in order to have the most informed view when making the expansion decision. In this scenario, the countries being evaluated are the United States, Saudi Arabia, Brazil, India, South Africa, Iran, China, and Turkey. This report analyzes the banking systems of each of these countries against the World Bank criteria.

Before investigating the banking systems in each country, a brief overview of the prevailing economic conditions in each nation is provided. The size of the economy, measured by GDP and by GDP per capita, is related to the market potential for a bank entering that country. The more money there is in a country, the better it will be for a bank to enter. The following figures were calculated from the CIA World Factbook.

These figures show that all of the economies selected for study are fairly large. The following should be taken into consideration with respect to these statistics. First, Saudi Arabia's economy has cooled off considerably in the past few years. Second, Turkey's economic growth is highly volatile. It is further worth noting that the economic performance of both Saudi Arabia and Iran is almost entirely related to the price of oil — as oil goes, so too do those economies. There are also substantial differences in the GINI index across these countries. Most Saudis earn much less than the GDP per capita figure, as wealth is highly concentrated in that country. In South Africa, there are stark class divisions as well, with a relatively small population living roughly at a Western standard of living, while most citizens live in poverty. Such great wealth disparities directly affect the size of retail banking markets in particular.

Banking Industry Structure

Before investigating the banking indicators, one critical factor must be considered: the openness of the banking system. The United States has an open banking system with relatively little regulation compared with most countries. The retail banking system is somewhat diffuse but is becoming more concentrated. It is therefore open to expansion, though not as concentrated as the UK market. Three countries on this list — China, Saudi Arabia, and Iran — have closed banking systems where foreign banks are allowed minimal presence if any, and the banking system is almost entirely populated by state-owned enterprises. Of the countries studied, South Africa has the banking system most similar to that of the UK in terms of structure and openness.

Banking System Measures by Country

The World Bank Global Financial Development Database provides data on the banking systems of countries around the world. The following chart reflects data from the banking systems of the countries chosen for analysis, with figures from 2011.

* Branches per 100,000 adults (access measure)
** Deposit money banks' assets to GDP % (depth measure)
*** Bank overhead costs to total assets %
**** Bank z-score

Note that the z-score is a measure of financial institution risk (Lepetit & Strobel, 2013), roughly evaluating the likelihood of default of a country's banking system.

United States

The United States is the world's largest economy and has a highly evolved banking system. In the past, regulations meant that retail banks were restricted to the state level and that there was separation between retail and investment banking. Successive waves of deregulation in recent decades have removed these restrictions, leading to increasing concentration in the U.S. banking industry (Chossudovsky, 2008). Nevertheless, it remains one of the most diffuse banking industries in the world.

The U.S. has generally favorable metrics. The country has the second-highest rate of branch access among the nations studied. The U.S. banking access level appears to have reached a saturation point, as the trend in access is unchanged in recent years. Deposits are declining in relation to GDP — a measure that must be understood in context: as the U.S. economy grows, consumers tend to swap savings for spending. Savings rates are currently declining as the economy improves, explaining the change in this ratio (FRED, 2014). U.S. banks have moderate performance in terms of efficiency, and they are trending in the wrong direction, potentially highlighting overcapacity in the industry when considered alongside the very high access numbers.

The z-score is highest among all nations studied, indicating that the U.S. has the least stable banking system in this group. This might seem counterintuitive, but this is an industry that may have excess capacity — one in which hundreds of bank bankruptcies occurred recently, including high-profile ones, and where the government needed to bail out the entire banking system to prevent its collapse. The high level of deregulation has led to excessive risk-taking within the U.S. banking system, driving its very high z-score. The U.S. Federal Reserve provides data on that nation's banking balance sheet, illustrating that system-wide there is sufficient liquidity, though not at an exceptional level (U.S. Federal Reserve, 2014). Overall, the U.S. is going to be a tough market to enter because of saturation, inefficiency, and a higher risk of default than in any of the other banking systems studied. Only the size of the economy and minimal barriers to entry make the U.S. an attractive market.

Saudi Arabia

Saudi Arabia has a closed banking system in which banks — along with most major corporations — are owned by the government. There are 13 domestic banks. Saudi banks are also Islamic banks, meaning that entering the Saudi market would require operating under Sharia law principles (KSA, 2013). The country has relatively low access, though access is increasing. In addition, Saudi Arabia has the lowest score for bank assets relative to GDP. On the positive side, the Saudi banking system is relatively efficient and has a decent z-score. The backing of the government, underwritten by oil revenues, helps ensure the stability of the Saudi banking system. The low access score highlights potential opportunity in an underserved market, but deposits are also low. While deposits and access should be correlated, the causal relationship is not known — it is possible that access is low because bank deposits are low, or vice versa.

Brazil

Brazil has the highest penetration of bank branches among the countries studied, indicating strong growth. Access is high and growing, suggesting that the banking system is still being built out. However, access levels well above most other countries also raise the possibility of overcapacity. The high level of deposits relative to GDP suggests that growth in the Brazilian banking system is being driven by rising demand. Overhead costs have been volatile in recent years and are much higher than in other countries — to be expected in an economy where the banking system is expanding rapidly, since new branches cost money and high overhead is an indicator of an inefficient system that may be set to contract. That said, the z-score is reasonable, meaning there is good stability in the Brazilian banking system.

India

The Indian banking system has fairly low bank branch penetration, though this is growing. Deposit levels are moderate but also growing. The efficiency of the Indian banking system is improving, perhaps because of the limited buildout of branches. On these three metrics, India shows a stable trajectory. The critical concern is the high risk of default, as India carries a very high z-score. This means that while the Indian market has promise, it also carries significant risk.

South Africa

South Africa has low banking penetration per capita, but most of the country is very poor. Penetration among middle-class and wealthy individuals is arguably better, and the market is not necessarily underserved within those segments. Deposits are high, but the banks are relatively inefficient. While efficiency is improving, this is an alarming figure given high deposits and low market penetration. One inference is that there may be opportunity for an efficient bank to enter the South African market and undercut existing players. Stability in the South African banking system is very high for a system that is not government-owned.

Iran

Iran's banking system is a wild card. There is healthy penetration of bank branches, and most banks are government-owned and practice Islamic banking. However, deposits are very low and declining. Other measures are unavailable. Given that Iran is a petro-economy subject to strict international sanctions, it is reasonable to assume that many Iranians are avoiding their own country's banking system, resulting in declining deposit levels. This would be a very challenging market to enter because of regulatory concerns and, of course, the fact that diplomatic relations between the UK and Iran are minimal, which would greatly politicize any market entry attempt (Dehghan, 2014).

China

Branch data per 100,000 adults is not available for China in the dataset, which is unusual. However, China has a fairly healthy density of branches — they are common in large cities, and even smaller towns typically have one or two branches, so there is generally good access to banking. Deposits are very high, a function of China's strongly positive balance of trade. Efficiency is very good, and China has a reasonable level of stability in its banking system. Furthermore, China has a very large economy that has sustained high growth levels for many years. As a consequence, while China remains mostly closed to foreign banks — particularly at the retail level — it is the most promising market on this list.

Turkey

Turkey has seen improving access in recent years, correlated with healthy economic growth. While banking — along with most major industries — is subject to a high level of government intervention, the Turkish banking system is beginning to take on the characteristics of a modern banking system. Deposits are increasing alongside access, indicating that the banking system is on a growth trajectory, and with this, efficiency is improving. The stability of the Turkish banking system is very high due to government ownership and involvement, while at the same time foreign private banks have a presence in the Turkish market. This is a favorable market overall.