Retail Success Drives Most Banks' Stock Price: Other Than ROE and Revenue-per-Share Growth, a Bank's Same-Store Deposit Growth Is the Most Powerful Determinant of Its Total Return to Shareholders

By McCormick, James M. | American Banker, November 16, 2005 | Go to article overview

Retail Success Drives Most Banks' Stock Price: Other Than ROE and Revenue-per-Share Growth, a Bank's Same-Store Deposit Growth Is the Most Powerful Determinant of Its Total Return to Shareholders


McCormick, James M., American Banker


Five years ago my firm suggested that the industry did not respect retail franchise banking because it was seen as a mature, commodity service with low growth prospects.

But we had an alternative view after calculating the service's warranted-price-to-earnings ratio, based on modern finance calculations, reflecting the business' high return on equity and low risk. For example, we noted that even modest organic growth in retail franchise banking could result in an implied P/E of 20 for this line of business. Further, stock repurchases funded by retail's positive cash flow would be beneficial to the bank's earnings per share.

Since then some retail banks have invested in improving their street-corner value proposition. As a result, these banks have gained market share, and their stockholders have been rewarded accordingly.

In our latest analysis of stock price drivers of a peer group of retail franchise banks, we have found that - other than ROE and revenue-per-share growth - a bank's same-store deposit growth is the single most powerful determinant of total return to shareholders.

In other words, properly calculated same-store retail deposit growth is the key driver of organic revenue growth, which has been proven to drive EPS and total shareholder return over time. The relationship between market return over the three years that ended Dec. 31 and same-store deposit growth in mature retail branches was an impressive 60%, implying that a corresponding amount of the variability in shareholder returns was associated with a bank's organic retail deposit growth.

To identify this correlation, my firm assembled a universe of regional franchise banks from the largest 150 U.S. bank holding companies.

During the last six years the compound annual growth rates in total market returns for the organic growth-oriented retail franchise banks in this group varied. The top 20% achieved average returns to shareholders of 20% a year, about 10 times higher than the bottom 20%. The same-store retail deposit growth for these bank subsets was 7% a year and 1% a year, respectively.

Our same-store deposit growth measure is derived from analysis of Federal Deposit Insurance Corp. data. For example, we calculated that over the supposed boom from 2003 through 2004, the growth rate for retail deposits averaged only about 150 basis points higher than the longer-term average.

Moreover, our analysis shows that the growth of retail deposits has been surprisingly steady during the past 50 years and closely correlates with net household and small-business formation rates, as well as inflation.

In 2003 and 2004 the predominant source of growth for many institutions was nonretail deposits. Adjusting the FDIC numbers according to these insights can materially impact the resulting messages.

Two examples illustrate this point:

Wintrust Financial Corp. of Lake Forest, Ill., has retail deposit growth materially higher than its overall deposit growth. In other words, core street-corner deposits are growing faster than would be apparent from a simple analysis of FDIC data.

Also, Nevada's retail deposit growth is only about half the state's unadjusted FDIC deposit growth. Though it's still a high-growth state, almost 50% of the unadjusted growth springs from higher-rate, mostly out-of-state-brokered monies that are funding credit card and other specialty business operations. …

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