Banking's Top Performers 2006: Part 1: Banks with Assets over $3 Billion

Article excerpt

Half-way through 2006, the trends that influenced performance last year continue to challenge bankers to maintain the industry's five-year string of record-breaking profits. And while the industry continues to set records, there has been a considerable amount of change among the banks that do best in any given year, as the table opposite attests.

Banks last year enjoyed strong growth in commercial real estate and commercial and industrial lending, which made up for a decline in residential mortgage lending late in the year. The residential market was, and continues to be, a hot topic, with ongoing speculation on whether there is really a "bubble" and where and when it will burst.

Meanwhile, banks continue to make adjustable rate and interest-only mortgage loans.

Although the Federal Reserve raised the target Fed Funds rate eight times in 2005, ending the year at 4.25 %, long-term interest rates remained low, resulting in an inverted yield curve at year-end. With such low interest rates, many banks' loan portfolios bulged, and they struggled to find low-cost funding. Americans just weren't inclined to save their money, and rising interest rates encouraged businesses to seek out better returns on their cash.

With the continued squeeze on margins impacting profitability, institutions deriving a significant portion of their income from non-interest sources, including some of the very largest banks in the country, fared better than their more spread-dependent counterparts. Companies with large non-intermediation businesses, such as Citigroup, U.S. Bancorp, and Wells Fargo saw sharp upticks in their rankings during the year.

The year 2005 also saw the near extinction of the monoline credit card companies as Providian Financial, MBNA, and Metris were acquired, and Capital One announced it was buying Hibernia Bank (and more recently, North Fork Bank). Hurricanes Katrina, Rita, and Wilma wrought havoc on the Southeast, but the otherwise favorable economic conditions kept everyone afloat: 2005 was the first year since the FDIC was created that there were no bank failures.

In part one of the 14th annual ABA Banking Journal performance rankings, we review the financial results and strategies of the nation's largest banks and thrifts. Part two, which will appear next month, will high-light the top performing community banks and thrifts.

Selection criteria explained

Our study ranks the performance of domestic institutions with assets over $3 billion as of Dec. 31, 2005. Two groups were included in our analysis: publicly held depository institutions (banks, thrifts, and bank or financial holding companies) and private depositories. A total of 159 public banks, thrifts, and holding companies and 51 private institutions qualified under our selection criteria. They were ranked by return on average equity ("ROAE") for 2005. In instances where the reported ROAE was identical for two or more institutions, 2005 return on average assets was used as a secondary ranking criterion.

(Three banks that met our selection criteria were not included in our analysis, because their data was not available in time for this article. Those banks were: Doral Financial Corp., of San Juan, P.R.; First BanCorp of San Juan; and R&G Financial, of Hato Rey, P.R.)

By Stephanie Norwell, consultant, and Vanessa Mambrino, associate, Capital Performance Group LLC, Washington, DC, a firm providing advisory, planning, analytic, and project management support to the financial services industry.

Previous analyses included a ranking of specialty lenders, a category that historically was composed largely of mono-line credit card companies, sub-prime home mortgage lenders, and student lenders. With the acquisition or diversification of many of these companies, the pool of specialty institutions has shrunk to barely a dozen companies with assets over $3 billion. As a result, we chose to drop the separate specialty lender ranking. …