The decline in fortunes of IT companies allowed banks to move up from second place in last year’s Global 500 rankings to become the largest sector. Even so, the number of banks in the rankings dropped from 70 to 67 and the sector’s total market capitalisation fell from $2,382bn to $2,132bn.

Chief among the banks is Citigroup of the US, whose market capitalisation of more than $255bn dwarfs even its nearest competitor, HSBC Holdings of the UK.

Banks had a difficult time last year as economies around the world slowed down. The sharp reversal of fortunes for telecom, media and technology companies that had borrowed heavily to fund ambitious growth plans took their toll, as did the attacks of September 11, which put even more pressure on banks to revalue asset portfolios downwards, incurring restructuring charges. Balance sheets were also hit by blows from Enron, the collapsed energy company, Swissair, the airline that went bankrupt, and the troubles in Argentina.

Yet, there was no banking crisis. Most banks are better capitalised than they were a decade ago, many have diversified their business lines through mergers and acquisitions and risk management techniques have been improved. Although banking shares fell 14 per cent last year, they outperformed equity markets.

The fact that bank shares were less volatile than equity markets in general, including insurers, suggests they may be adept at selling on risk to other financial institutions. Loan exposures to telecoms, for example, are large in absolute terms, but take up a smaller proportion of banks’ balance sheets than in the 1980s. Individual industry exposures rarely exceed 4 per cent of banks’ portfolios.

Although a crisis has been averted, earnings suffered from the deterioration in the quality of banks’ loan books and from weaker equity-related revenues, such as fund management and investment banking fees.

Net profits at European banks fell 27 per cent last year. The return on equity for the sector in Europe fell from 19.1 per cent to 12 per cent.

Matthew Czepliewicz, analyst at Credit Suisse First Boston, expects banks’ bad debt position to reach its worst point in the second or third quarter this year. Earnings growth will be light.

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