Financial Performance Standards for Regionals Becoming Clearer
March 20, 2012 at 11:44 AM
Since the onset of the financial crisis, investors and bank executives have speculated about what the performance standards would be in a post-crisis operating environment. There was widespread worry that a return on equity of less than 10.0 percent would be the new norm. While we do not have a complete picture yet, the outline of expected financial performance can be discerned from key profitability metrics posted in 2011 among publicly-traded institutions with total assets of $10.0 billion or more.
Financial performance in 2011 clearly illustrated a gulf between high-performing institutions and the industry average. In 2011, the median return on equity was approximately 7.5 percent. However, there were a number of higher-performing institutions that achieved ROEs above 10.0 percent. U.S. Bancorp, Minneapolis, MN set the standard with a return on equity of 14.7 percent. The company attained this level of profitability through growth in loans, deposits, and fee-base revenue while maintaining an efficiency ratio of 52.4 percent. It is important to note that this performance was accomplished in basic meat-and-potatoes banking businesses. In a recent investor presentation, management of U.S. Bancorp enumerated performance expectations for the company in several key areas:
Annual revenue growth of 7.0-8.0 percent
Annual growth in EPS of 8.0-10.0 percent
Normalized ROE of 16.0-19.0 percent
Normalized ROA of 1.60-1.90 percent
Efficiency ratio in the low 50.0s
As these standards show, it is clear that we are entering a new phase of bank performance. As asset quality problems recede and fears of a new recession abate, it is no longer sufficient for an institution to possess above-average asset quality and high levels of tangible common equity. Rather, management of the institution must demonstrate an ability to grow revenue and earn a profitable return on shareholders’ capital. So it seems that the post-crisis performance standards are strikingly similar to the pre-crisis performance standards.