Academic journal article ABA Banking Journal

Banking's Top Performers

Academic journal article ABA Banking Journal

Banking's Top Performers

Article excerpt

Banks get little respect from the market, but the best of the big banks posted impressive returns on equity, despite shrinking net interest margins

The stage was set for outstanding performance across the banking industry in 1999, and the industry didn't disappoint. The booming economy, soaring stock market, high levels of consumer confidence, low unemployment, and quiet inflation combined to benefit the financial services industry, and most banking companies recorded sharp increases in profits in 1999.

All was not sunshine, however. Because of upward movement of interest rates, investors essentially ignored the extraordinary financial performance of banks last year. While the Dow Jones Industrial Average and the S&P 500 increased 25% and 20% respectively, the American Banker Stock Index of 225 banks fell almost 10% during the year. In addition, competition in financial services continued to intensify, and the industry's net interest margins fell to new lows. On balance, as the accompanying tables clearly show, banks overcame the effects of the negatives and racked up a very strong year.

Part I of the eighth annual ABA Banking Journal Performance Rankings takes a look at large banks and bank holding companies to gain some insight into the factors contributing to their financial performance over the past year. Part II of the rankings, which will appear next month, will highlight top performing community banks and investigate the trends that have led to their success.

Selection criteria

This year's study focused on publicly held banks and bank holding companies with over $1 billion in assets as of Dec. 31, 1999. A total of 228 institutions qualified under that criterion. Institutions were ranked by return on average equity for 1999. In instances where the reported ROE was the same for two or more institutions, 1999 return on average assets was used as a secondary ranking criterion. The 100 institutions with the highest ROE were selected as the industry's top performers.

Nonpublic banking institutions were not included in the analysis. A large number of these institutions with more than $1 billion in assets are limited purpose subsidiaries of larger institutions--for example, the credit card captive of a department store chain.

Data was obtained from Sheshunoff Information Services as of December 1999 and from Securities and Exchange Commission filings.

Movers and shakers

Although asset size did not correlate to a high ROE, the industry assets represented by the top 100 performers saw a huge jump in 1999 with the addition of Citigroup, Wells Fargo, J.P. Morgan, and Bank of America. These four institutions accounted for assets of over $1.8 trillion dollars. Smaller institutions were also amply represented in the group, as demonstrated by another notable newcomer: Peoples Bancshares (Mass.), which leapt into the number six spot with an ROE of 24.82% and assets just over the billion-dollar cutoff. Several of last year's top performers failed to make the grade this time around. Fleet, AmSouth, and Zions experienced large declines in net income due to merger-related charges. UnionBanCal fell from the rankings due to an $85 million restructuring charge in the third quarter. Eight of the 30 institutions to drop from the rankings this year were acquired in 1999.

The biggest movers on the up side were Silicon Valley Bancshares, up from 95th in last year's rankings to 15th this year, and National City Corp., up 66 places to a rank of 11. In the other direction, Summit Bancorp fell from 40th to 86th, due to nonrecurring charges for business line realignment and an increase in its loan loss provision, and CVB Financial Corp. dropped from 26th place to the 55th spot due to merger costs.

Raising the bar

Last year, the industry's ROE surged forward, with significant increases for many institutions. The median 1999 ROE of the 228 publicly traded institutions eligible for ranking was 14. …

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