G-SIBs, or Globally Systemically Important Banks, comprise some of the biggest banks in the world and face additional regulations than smaller banks.
They are called globally systemically important because of the failure of any one of them could cause a great financial collapse—something the world faced the possibility of in 2008-2009.
This last “Great Financial Crisis” taught us that some banks were deemed “Too Big to Fail”, because upon their collapse the entire financial system’s survival was at risk, and so governments stepped in with large bailout packages.
Today, the world economy hopes to prevent such precarious situations from happening again; to preemptively combat this the G-SIBs classification was created.
As of November 11, 2020, the Financial Stability Board (FSB) identified 30 banks which made the official G-SIB list and comprised the same number of banks as in 2019.
Depending on the systemic importance of each G-SIB bank, they are placed into one of 5 buckets with the following “required level of additional common equity loss absorbency as a percentage of risk-weighted assets that each G-SIB will be required to hold in 2022”:
- Bucket 1 = 1.0%
- Bucket 2 = 1.5%
- Bucket 3 = 2.0%
- Bucket 4 = 2.5%
- Bucket 5 = 3.5%
These requirements are part of (and in addition to) the Basel III capital framework, which sets capital requirement minimums as updated in response to the previous crisis.
You can read about how the buckets are defined in this document published in July 2013.
For our purposes, here’s an overview of the 30 banks and their bucket classification as of the time of this writing (I added the stock tickers for some of the major ones below):
Of the U.S. based G-SIBs, we have the following (with ticker):
- Citigroup (C)
- JP Morgan Chase (JPM)
- Bank of America (BAC)
- Bank of New York Mellon (BK)
- Goldman Sachs (GS)
- Morgan Stanley (MS)
- State Street (STT)
- Wells Fargo (WFC)
While each of these are big U.S. banks, you’ll find that the actual businesses and profit generators for each of these financial institutions can vary widely.
Banks such as the G-SIBs can typically be classified as Bank Holding Companies (BHC) and/or Financial Holding Companies (FHC).
The top money center banks here such as Citi, JP Morgan and Bank of America all are FHCs with multiple subsidiaries—some are associated with their Consumer Banking segments which serve more traditional functions such as taking customer deposits and writing loans, while other subsidiaries may deal in completely different businesses such as derivatives trading or asset management.
What makes the G-SIBs hard to analyze for the average investor is that each bank has a different focus, and with all of the complex financial transactions they are apart of, they can have annual reports which top 200 pages or more.
Hopefully this post clears up a lot of the muddy waters—we’ll see how a bank like JP Morgan deals more on the consumer (or retail) side, while someone like Citi has a primarily institutional focus.
Breaking down the G-SIBs and Their Segments
I’ll be referencing 2019 financials, as these might present a better picture of each bank’s more traditional focus and has not been tainted by the pandemic’s dramatic effects on the numbers.
Starting with Bank of America, a company that boasts itself as one of the world’s largest financial institutions…
A few clarifications on the screenshot above, which will be necessary to understand the rest of the screenshots down this post:
- NII = Net Interest Income
This figure reports the spread between the interest earned by the bank from loans or investments minus the fees that paid to hold onto a customer’s cash. In a traditional retail bank, the NII would tell us how much the company made by lending out its customers’ deposits.
In general, a retail bank can increase their NII in only three main ways:
- Attract more customer deposits
- Earn a higher rate of return on their lending
- Pay less interest expense on deposits
Since interest rates fluctuate over time, a bank can see the actual dollar amounts which comprise NII fluctuate greatly over time (such as Net Interest Revenue and Net Interest Expense).
Sometimes a bank with superior NII margins has competitive advantages which allow them—such as better customer stickiness which allows them to pay out lower interest expense yield. However, just because a bank has a good NII margin or growth doesn’t mean it is necessarily the best investment; a bank could take on higher lending risks in order to fatten their NII profit margins, which can blow up like we saw with subprime mortgages and loans in the Great Financial Crisis.
- NonIntInc = Non-Interest Income
There’s two primary ways a big bank (G-SIBs especially) will generate revenues; one through NII and the other with Non Interest Income.
Non-Interest Income refers to the other fees and services that a bank will provide which fall outside of the traditional lending and taking deposits.
For example, if a bank can charge annual account fees, or bank overdraft fees; these would fall under the non-interest income category.
There’s a myriad of types of non-interest income, and we’ll discuss some of them as we see them in the context of the G-SIBs we examine.
- NonIntExp = Non-Interest Expense
Another way to think of Non-Interest Expense is as operating expenses. It takes employees to run a bank branch and an electric bill to power the building, and these expenses would fall under non-interest expense in contrast to the expenses paid to directly hold a customer’s deposits, such as savings account or CD yields.
In order to calculate a bank’s pre-tax earnings, you must take Non-Interest Income and subtract Non-Interest Expense (to essentially get a company’s “non-interest profit”), and add this to NII (profit from interest spread).
- EBT = Earnings Before Taxes
This metric is the figure that is most synonymous with Operating Income for a non-financial company; it essentially helps us break down the earning power of a bank’s operating segment without potentially skewing the final result from taxes (which depend on timing and can be delayed or pulled forward and make earnings look temporarily better or worse).
Next to each G-SIB’s EBT per segment you’ll see I added a “%” column, which simply relates each segment’s EBT with the sum of the rest of the segments.
This will give us a better idea of which business segments have a bigger impact on each bank’s total earning power.
This one is pretty self-explanatory. Similar to an EBIT margin, we’re simply comparing each segment’s EBT to its total revenues (both from interest and non-interest) to see its relative profitability.
The EBT margin for each G-SIB can vary based on how they choose to classify each business function—for example, JP Morgan puts Commercial Real Estate with Middle Market lending in their Commercial Banking Segment, while Wells Fargo sweeps Commercial Real Estate with their Market Making business under their Corporate and Investment Banking segment.
One other potential cause for discrepancies is that for simplicity’s sake, we are just looking at 2019, which could have its own one-time distortions to the figures.
Despite both of these limitations, this data should give us a decent overview of what each G-SIB primarily focuses on, and how we want to structure our investments and analyses in response.
Financial Results for each (U.S.) G-SIB by Segment
Let’s go back to Bank of America’s financials again to better understand the company.
After parsing through the dizzying line-items in the 10-k, we can see that B of A’s consumer banking segment makes up the biggest portion of EBT, at 44% of total EBT. Interestingly enough, their EBT Margin was also 44%, 44.5% to be exact.
Contributing in a reduced capacity was Global Banking, at 29% of EBT. I’ll note that in 2020 the company saw Global Markets balloon to 29% of EBT while Global Banking dropped to 19%, due to the increased volatility and other effects of the 2020 pandemic.
But, when it comes to starting to understand the primary growth drivers of Bank of America, we can see that the Consumer Banking segment is the way to go.
Secondly, I highlighted the $28,158 figure for BAC’s 2019 NII, as you can see it is almost triple their Non-Interest Income for the same segment. This was actually shocking to me; knowing that Bank of America is one of the older, more traditional branch banking institutions I would’ve expected the company earned most of their revenues through pesky fees which was common in the early 2000’s.
However we can see that this is not the case, and that on a comparative scale the non-interest income is less of a driver.
That means that projecting Bank of America’s earning power moving forward probably depends more on their NII, which in B of A’s case means consumer deposits and lending, rather than a focus on account fees or services or something like that.
Next let’s do JP Morgan (JPM):
Here’s another G-SIB with a big consumer focus; for JPM they call it their Consumer & Community segment. For JP Morgan, this includes regular retail functions as well as Wealth Management and Business Banking, as well as Home Lending and Credit Card and Auto.
The company’s Corporate and Investment Banking comes in at a close second for EBT, making the company mostly dual focused.
Corporate and Investment Banking is more reliant on fees than it is on making profits on a “spread”, and can include anything from traditional investment banking fees (such as for directing an IPO) to something like “Principal transactions”, which is JPM’s highest noninterest revenue source for the segment.
Note that JPM’s EBT Margins for these segments are pretty high, and fall in-line with B of A’s consumer banking segment in that respect.
Citigroup (C) is its own very unique bank from the other major money center banks in that it is very institutional focused:
You can see that the company’s Institutional Clients segment can be further broken down into Banking and Markets categories, with notes attached for some of the major drivers of its Treasury & trade solutions activities and fixed income market making (also a huge portion attributed to “principal transactions”.
I’ll also note that Citi is one of the more globally focused G-SIBs, with much of its revenues based out of foreign countries outside the U.S.
Next down the list is the infamous Wells Fargo (WFC):
Like JPM and BAC, Wells has a significant dependance on its consumer banking to drive EBT. Notably the company’s EBT Margin for consumer is quite lower than BAC and JPM’s, though their recent troubles have been well known for some time.
The company also does quite a bit of business in its Corporate and Investment Banking segment, with 29% of 2019 EBT attributable to the segment which includes Commercial Real Estate and Market Making services.
Now let’s talk about the two other big Investment Banks based in the United States—Morgan Stanley (MS) and Goldman Sachs (GS).
These are in a league of their own compared to the big money center banks because they don’t serve retail consumers, but instead have their business segments spread out like this:
You can see that the revenues for both of these companies come primarily from non-interest income, which can give their earnings different exposure to interest rate flucutations than some of the other G-SIBs which draw much higher percentages of NII.
Finally, we have the big custodian banks, which primarily manage money for high and ultra-high net worth individuals and institutions.
Among the two most well known are Bank of New York Mellon (BK) and State Street (STT), and both of these qualified as G-SIBs according to the November 2020 FSB list:
It should not be surprising to see large percentages of non-interest income for these businesses, as they are primarily managers of capital (through private bank, wealth and asset management) rather than direct depositors and lenders.
And In Conclusion…
We can see that to really understand the G-SIBs, you have to understand the different businesses, activities, and revenue sources that each bank lives on.
It can be very easy for investors to paint all big banks with a broad brush; but as we can see they are all very different types of businesses with different revenue drivers.
In moving forward with analyzing these banks, it will be helpful to reference this revenue and profit information in determining which bank ratios are best suited for understanding the effectiveness of the companies’ business models and competitive advantages.
This should be a starting point, and not an ending point, of good fundamental analysis for companies that are as complex as multinational financial institutions.