Like the U.S. economy and the stock market, banks in America had a great year in 2019. Bank stocks surged over 20%, nearly keeping pace with the S&P 500 Index, and the industry racked up a record $180 billion in profits through the first three quarters of the year. Just 4% of banks nationwide were unprofitable last quarter and problem banks, as defined by the Federal Deposit Insurance Corporation, fell to the lowest level since before the financial crisis.
“2019 was a great year to be a banker,” says Frederick Cannon, director of research at Keefe, Bruyette & Woods, an investment bank focused on the financial sector. “The profitability of the banking industry is very strong and it’s strong in a good way. The return on assets is near peak levels.”
At the start of 2019, banks had just ended a 12-month stretch where they hit new highs in profitability, fueled by President Trump’s tax cuts and the Federal Reserve’s hiking of interest rates, which helped to fatten bottom line profits. But bank stocks and the broader market languished in 2018 after one of the sharpest December selloffs on record. In response, the Fed not only paused its interest rate hikes, it cut rates three times over the course 2019 as the Fed funds rate fell from 2.25-to-2.5% to 1.5%-to-1.75%.
The rate cuts crimped some interest rate-sensitive profit centers for large lenders, especially America’s biggest consumer and trust banks. (Banks generate most of their money by capturing a spread between the interest they earn on loans they make versus the interest they pay out to depositors.) But the cuts added new fuel to a decade-long bull market. U.S. stock markets returned 29% in 2019, propelled by low rates and record low unemployment. That economic backdrop proved to be a good balance for banking CEOs, who didn’t have to worry about an imminent turn in the economy.
Click here for the full list of America’s Best Banks.
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“The cutting cycle appears to have stabilized the economy and thus the credit of banks,” says KBW’s Cannon. “While I think bankers may rue the fact that the Fed went the other way on its rate hikes, it is more important for bank investors and bankers that the economy remains stable and we avoid credit losses.”
There are more than 5,000 banks and savings institutions in the U.S., but assets are increasingly concentrated at the top. The 100 largest have $14.4 trillion in assets, representing 81% of total U.S. bank assets. Asset quality and profitability vary wildly among those institutions. With that in mind, Forbes examined the financial data to gauge America’s Best Banks.
Born out of the financial crisis of the late 2000s, this is the eleventh-straight year Forbes enlisted S&P Global Market Intelligence for data regarding the growth, credit quality and profitability of the 100 largest publicly-traded banks and thrifts by assets. The ten metrics used in the rankings are based on regulatory filings through September 30. The data is courtesy of S&P, but the rankings are done solely by Forbes.
Metrics include return on average tangible common equity, return on average assets, net interest margin, efficiency ratio and net charge-offs as a percentage of total loans. Forbes also factored in nonperforming assets as a percentage of assets, CET1 ratio, risk-based capital ratio and reserves as a percentage of nonperforming assets. The final component is operating revenue growth. We excluded banks where the top-level parent is based outside the U.S.
CVB Financial, the parent company of Citizens Business Bank, usurped Arkansas-based Home BancShares as the top-rated bank in America. The Ontario, California-based small business lender was in the top-20 across every metric Forbes tracked, and it shone brightest in its efficiency ratio (40%), operating revenue growth (42%) and posted a negative net charge off ratio. The median bank on Forbes’ list, by contrast, had a 57% efficiency ratio, posted operating growth of just 5.4%, and experienced a charge off rate of 0.17% of average loans. CVB, founded in 1974 and with over $11 billion in assets and over 50 branches across the state of California, has seen profits rise for 170 consecutive quarters.
The top three banks on Forbes’ Best Banks list all came from California, with Santa Clara-based SVB Financial placing #2 and Irvine-based Pacific Premier Bancorp placing #3. Home BancShares, which had been the top-rated bank for two years running, placed #4.
Smaller banks and those focused on commercial lending continued to dominate the top levels of the Forbes Best Banks list. No bank inside the top-20 had more than $100 billion in assets. Rounding out the top-10 were Muncie, Indiana-based First Merchants (#5), Phoenix-based Western Alliance Bancorp (#6), Wheeling, West Virginia-based WesBanco (#7), Houston-based Prosperity Bancorp (#8), Kalispell, Montana-based Glacier Bancorp (#9) and DeWitt, New York-based Community Bank System.
“Relationships matter and middle market lending. The small and mid-cap banks have an exceptionally good ability to create personal relationships with their clients,” says KBW’s Cannon, who adds, “commercial banking is a deposit rich endeavor. The middle market lenders still have excellent access to low-cost deposits.”
Consolidation played a role in 2019 as BB&T and SunTrust Bank closed a $66 billion merger in December. Ranked #59 and #94 in 2018 respectively, the merged bank, now called Truist Financial, ranked #46 in our newest ranking.
The Big Four of U.S. banking—JPMorgan Chase, Bank of America, Citigroup and Wells Fargo—have a combined $9.1 trillion in assets, or more than half the U.S. total. Among these big banks, performance was strong with most firms gaining on the Best Banks list, led by balance sheet strength, efficiency gains and high credit quality.
JPMorgan returned to the top half of our ranking, placing #42, up nine spots. The financial metrics of the nation’s biggest bank generally improved over the past 12-months and outpacing its big bank competition meaningfully. The Jamie Dimon-led firm scores best for its 18% return on tangible common equity, placing #13 overall, and for its strong capital ratios. In the fourth quarter, JPMorgan’s 31% consumer banking return on equity, propelled the firm forward.
“The U.S. consumer continues to be in a strong position, and we see the benefits of this across our consumer businesses,” Dimon said in a Jan 14. earnings release. “The robust holiday season was reflected in our card sales volumes and loan balances, up 10% and 8%, respectively.” JPMorgan’s investment bank also posted a solid 14% RoE, which outperformed out-performed Wall Street peers like Goldman Sachs and its 10% RoE.
Bank of America climbed 18 spots to land at #71 on due to across the board strength. Its efficiency, asset quality and high risk-based capital ratio all placed in the top half of Forbes’ rankings, while the firm’s 15.3% return on average total common equity placed #51. Citigroup was also a gainer, rising four spots to #76 and performing best in credit metrics like risk-based capital, reserve coverage, and asset quality.
However, Wells Fargo continued to fall in Forbes’ rankings in the wake of a 2016 fake accounts scandal that has cost the bank billions, the departure of two CEOs, and prompted a Federal Reserve sanction against asset growth. Wells dropped two spots in 2019, placing #87. In October, the San Francisco-based lender appointed former Visa and Bank of New York Mellon head Charles Scharf as its CEO after a lengthy search process, but its recent earnings underscore the challenge ahead. In the fourth quarter, profits at Wells plunged 50%-plus and revenues dropped 5% to below $20 billion.
“We came out of the financial crisis as the most valuable and most respected bank in the US.But as you know, we made some terrible mistakes and have not effectively addressed our shortcomings. These circ*mstances have led to financial underperformance,” said Scharf on a Jan. 14 conference call with investors.“But we have one of the most enviable financial services franchises in the world and employees that want to do what's necessary to again be one of the most respected and successful banks in the US.”
Over the past 12-months, JPMorgan’s stock surged 34% and Citigroup rose 30%, both beating the 26% total return of the S&P 500. Banks of America returned 20%, while Wells Fargo was a major laggard. Its shares have fallen over the past year, but dividend payments mean the lender posted a 1.7% total return.
While rising dividends and buybacks continue to be a catalyst for banks stocks, the Federal Reserve’s decision to cut interest rates does present a problem.
Their already anemic net interest margins are heading lower. As JPMorgan’s stock surged in 2019, its NIM opened the year at 2.55%, but closed at 2.38%. The bank placed #94 overall on interest margins. Other potential 2020 headwinds include new accounting regulations from the Financial Accounting Standards Board surrounding credit loss methodologies.
Rounding out the top-100 was Wyomissing, Pennsylvania-based Customers Bancorp, a commercial and consumer bank created in 2009 to clean up a failing bank and do FDIC-assisted deals. Now with $11.7 billion in assets and a presence along the I-95 corridor from Washington, DC to Boston, it placed in the top half on most credit quality metrics, with lower than average net charge-offs, non-performing assets and higher reserve ratios, but was in the bottom decile on most profitability metrics.
