Foreign Banks' Big Market Share Hides Weak Profits
Kraus, James R., American Banker
Foreign banks held $893.7 billion of onshore banking assets booked at offices in the United States, according to the latest survey by the American Banker.
That represented nearly 22% of the total U.S. banking assets as of June 30 last year, a market share virtually unchanged from 12 months earlier.
The survey found that these banks also held some $203.9 billion in commercial and industrial loans, or loans to U.S. businesses, up only slightly from the $203.4 billion for the previous period, and equal to around 33% of onshore business loans by banks in the United States.
But the real figures are actually higher. The Federal Reserve Board has estimated that if offshore assets booked in places like the Cayman Islands are included, foreign banks hold as much as 45% of all U.S. business loans.
U.S. banks, however needn't be concerned about growing competition from foreign financial institutions, experts say.
"Foreign banks may have a large share of the U.S. market but they make less money," says Andre A. Cappon, a banking consultant and president of the New York-based CBM Group Inc.
David Bodner, executive vice president in the United States for Zurich-based Bank Julius Baer and chairman of the Institute of International Bankers, agreed. "The whole issue raised in the past about foreign banks stealing commercial and industrial market share was simply nonsense," he says.
Foreign banks have been providing liquidity to U.S. banks by buying loans from U.S. banks, but U.S. banks kept the fat fees," he adds.
Still others share these views. In a study entitled "Are Foreign Banks Outcompeting U.S. Banks in the U.S. Market?" Daniel E. Nolle, a financial economist in the bank research division of the Comptroller's office, concluded the answer is no.
"Data show that foreign-owned banks in the U.S. have persistently exhibited lower profit rates than counterpart U.S.-owned banks. Subsidiaries of foreign banks have operated less efficiently than U.S.-owned banks, and in the last few years the credit quality of foreign banks plunged below that of U.S.-owned banks," he wrote.
Mr. Nolle added: "These findings call into question fears about foreign banks outcompeting U.S. banks in the U.S. market and suggest that, despite [foreign banks'] having captured a substantial share of U.S. banking business, further penetration of the U.S. banking market ... is far from certain."
Data compiled by Mr. Nolle suggest foreign banks have consistently lagged behind U.S. banks according to almost all measures of profitability.
In 1992, for example, foreign-owned banks had a 0.03% return on average assets compared with 0. …