-
You might think overhead expenses as a percentage of average assets decline as institutions get bigger. You'd be wrong.
July 23 -
Care deeply about the price at which you make an investment, whether it's in your own shares or another company's. Don't delude yourself about how great the future will be. And look for empirical evidence that you have an "edge", rather than simply assuming it.
April 8 -
There may well be too many banks in the United States. Thats a problem for stock investors and CEOs of publicly traded banks to address, not policymakers.
December 11 -
Bank M&A activity has been lackluster in most parts of the country. It will probably stay that way, since so many banks are too small for buyers to bother with.
December 2
How fast can banks grow over the long run? The data is sobering.
The chart below shows compounded growth in total assets and assets per share (A-PS) for the 15 largest U.S. banks by market capitalization, from the first quarter of 1996 through this year's second quarter.
Banks can increase earnings in only three ways: (1) increase ROA; (2) increase leverage (turn a given ROA into a higher ROE); and (3) grow assets. Only (3) is a viable long-term earnings growth strategy. Long-run improvements in ROA are difficult to achieve (cost savings from increased scale, the obvious low hanging fruit, are
[IMGCAP(1)]
What sort of growth numbers have banks posted? Many banks have delivered total asset growth well north of 10%, but growth in A-PS has been more modest just under 7% on average for these 15 institutions.
Why such a big difference? Because while acquisitions can greatly increase total assets, they tend to boost A-PS only modestly, if at all. Most of the largest banks have been aggressive acquirers.
The 7% average A-PS growth rate masks a lot of variance in growth across institutions. Why do some grow so much faster than others? Higher-ROE means higher potential A-PS growth. But chasing growth proved to be calamitous for several large institutions.
What does the future hold? Many banks have achieved lackluster asset growth in recent years. This will eventually change for the better. And institutions that saw their historical A-PS growth rates crushed by dilutive equity issuances will enjoy prospective A-PS growth.
But if measured across decades, prospective A-PS growth over 7% is unlikely. If you believe M&A helped big banks grow A-PS, this help won't be there in the future; there simply
Modest A-PS growth needn't be a bad thing for bank stock prices. But operating strategies that try to fight this reality might be.
Harvard Winters, a former investment banker, writes research on banks.