Bank Director Magazine recently came out with its Ranking Banking report for 2024. The analysis was performed by Piper Sandler using the following criteria:
"The report uses year-end 2023 data from S&P Global Market Intelligence. It uses four metrics to gauge the performance of public commercial and savings banks as defined by S&P. The metrics are core return on average assets and core return on average equity, tangible common equity to tangible assets, and nonperforming assets to loans and other real estate owned. Each bank is ranked on each metric, and the sum of the rankings produces a final score. Total shareholder return was excluded because some over-the-counter banks are thinly traded, making the metric unfair as a comparison."
I concurred with a Bank Director writer about the challenge with total shareholder return, as I rank top five banks every year on total shareholder return and had to use a minimum average daily trading volume to reduce the incidence of thinly traded banks topping the list because someone traded 300 shares immediately prior to my lookback.
Here is the reports top 25 banks. Note that lower total score is better because if you are ranked 1st in a category, only 1 is added to the score whereas if ranked 25th, then a 25 is added.
It's a good list with fine institutions that have obviously outperformed. I wanted to take another cut at it though. One is I wanted to push it forward to second quarter 2024 (the list was year ended 2023). Another critical addition is to determine if each bank was trending favorably in each metric. One thing I have learned being in the banking industry is momentum is critical to success. Particularly in an industry whose revenues are driven from their balance sheet. Meaning that tomorrow's sales doesn't equate to this quarter's profits. This quarter's profits were driven by sales two to four quarters ago. Net interest income is typically greater than 80% of community bank revenues. And the commercial real estate loan you booked today will contribute to profits next quarter, not necessarily this one. And the same for that business checking account.
So trend is critical to a bank's success. So I added trend to each category and awarded five points for every negative trend, and no points for positive ones, in sticking with the lower is better score used by Bank Director.
I should note some differences in categories. One is I used five quarter averages, meaning I looked back to the second quarter 2023 through the second quarter 2024. And I used NPAs/Assets as the asset quality metric. Here are the results.
Click on image to see it larger.
The top 2, Westamerica and Farmers & Merchants (California) are the same, meaning they not only outperformed the group in the Bank Director cut using 2023 numbers, but the above metrics and trends as well.
Big differences, however, happened from the Bank Director list. Cashmere Valley Bank, for example, dropped from number 7 on the Bank Director list to number 15 here. It wasn't because of their trends. They recorded positive trends from 2Q23 to 2Q24 in ROAA, ROAE and tangible equity/assets. In the Bank Director report, they were compared to 300 financial institutions. In the above table, they are only compared to the top 25 identified by Bank Director. Cashmere was high average in most categories when compared to 300. Ranking them a solid seventh because of their consistency. They received no such love when compared only to the top 25.
Moving significantly up in rankings were International Bancshares, from 24th to 5th, and 1st Source, also from tied for 24th to 8th. It was asset quality that dropped International in the Bank Director list, landing them 275th of 300 because the other metrics had them ranked well (number 1 in ROAA in the Bank Director report). Because asset quality in the above table only penalized them with a 22nd out of 25, they rose on the list. And shouldn't banks compare risk to reward? International Bancshares five quarter NPAs/Assets average was 57 bps. Not exactly a three-alarm fire.
1st Source, however, got their bump from positive trends in all four metrics measured, even though they were only 12th in ROAA and 18th in ROAE. Things are moving in the right direction. And as I mentioned, trend is important because revenues are mostly from balance sheets. And balance sheets move more like aircraft carriers than speed boats.
I would vote for including trend information in Bank Director's next Ranking Banking report. Because it is so critical in telling the story of who is performing well and who will continue to perform well.
~ Jeff
No comments:
Post a Comment