The Recovery of U.S. Commercial Banking: An Analysis of Revenues, Profits, Dividends, Capital and Value Creation
Washburn University. School of Business
Kaw Valley Bank
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.