The Recovery of U.S. Commercial Banking: An Analysis of Revenues, Profits, Dividends, Capital and Value Creation
PublisherWashburn University. School of Business
SponsorKaw Valley Bank
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This paper reviews the financial performance, risk, changing revenue and asset mix and prospects for future shareholder value creation of the 20 largest commercial banks in the US from 2003-2012. Fifteen of the 20 banks in the sample reported record revenues in 2012, with 12 of these banks also earning record profits. Revenue from interest income declined each year 2010-2012, resulting in banks generating more revenue from trading activities and fees. Aggregate dividends are still equal to their level 10 years ago, despite record profits and a mean effective tax rate of 25.2%, which is 4% lower than its pre-crisis average. Banks reduced their allowance and provision for loan losses each year 2010-2012, but 7.6% of all loans remain nonperforming, restructured or impaired. Net interest margin remained stable between 3.4%-3.7% from 2009-2012, while average profit margins have increased back to their pre-crisis levels. Banks hold an average capital/assets ratio of 11.4%, well in excess of the 10.0% regulatory minimum. Bank stock returns have lagged behind the S&P 500 since the market lows of March 2009. Average bank market betas shifted to a significantly higher range post-crisis, but have gradually declined to a mean value of 1.2. Aggregate MVA for commercial banks has been negative for 5 consecutive years, and aggregate EVA was negative from 2009-2011 before posting a strong turnaround in 2012, as banks' mean return on capital finally exceeded their cost of capital. Bank stocks were undervalued at the end of 2012 based on their P/B, PEG and P/E ratios, as well as value creation metrics such as future growth reliance and EVA momentum.