Cold Water on Idea of Banks as Hot Performers

Even as bank stocks have soared in price, the value of bank's capital to shareholders has been stagnant, a new analysis concludes.

Stern Stewart & Co., a financial consulting firm in New York, this week released its ranking of the 100 biggest banks in "market value added" and "economic value added."

"Although many major banks have improved their performance dramatically in 1995, the industry as a whole is essentially treading water," the company said.

The 100 banks in the ranking earned an average 12.37% return on capital, or a mere 93 basis points more than the 11.4% average weighted cost of the capital, the company said.

Stern Stewart created a stir in the marketplace when it released a similar analysis of industrial companies in late 1995 showing that such venerable companies as E.I. duPont de Nemours and Hewlett Packard had reduced economic value to shareholders.

This week's release represents the first time this analysis, which seeks to measure "market value added," has been applied to banking companies.

Al Ehrbar, a Stern Stewart spokesman, said the new measurement was created as an alternative to traditional yardsticks - such as earnings per share - that measure only size.

"Size does not say anything about performance, so you can have a company that is huge but has destroyed enormous amounts of shareholder wealth," he said.

To calculate market value added, Stern Stewart compares the difference between the total market value (the cash investors can take out) and invested capital (the cash they put in). If the MVA is greater than zero, the company has created wealth for its shareholder.

Stern said the biggest creator of MVA in 1995 was Citicorp, with $13.5 billion. First Interstate Bancorp ranked second with $8.1 billion, just ahead of Norwest Corp., with $7.7 billion.

Fleet Financial Group, absorbing some acquisitions during the year, showed a negative MVA of $1.7 billion. Bankers Trust, still saddled with the fallout from its derivatives unit, had a negative MVA of $31 million.

Fleet declined to discuss the report, saying it was not familiar with the analysis.

Thomas Parisi, a spokesman for Bankers Trust, said that he was unfamiliar with MVA, but noted that although the bank's earnings in 1995 "were subpar, they have improved significantly this year, up 66%, so we expect our MVA score to improve significantly."

Indeed, Stern Stewart's analysis showed that a company's MVA can vary radically from year to year.

In 1990, Citicorp would have ranked last among the 100 banks. NationsBank Corp., which ranked fifth in 1995, would have placed 95th a year earlier.

Stern Stewart also calculated economic value added by subtracting the cost of capital from net operating profits after taxes. EVA measures the wealth created for shareholders.

Banks with largest EVA's included Citibank, Wells Fargo, Norwest, First Bank System, and First Interstate.

Bankers Trust was at the bottom of this list with a EVA of negative $637 million. PNC Bank Corp. with a negative EVA of $456 million, has been "stymied by consolidation problems and a major securities loss," Stern Stewart said.

Although the new performance measurements have gained ground on Wall Street, there are some analysts who are lukewarm to it.

Analyst Richard X. Bove of Raymond James & Associates in St. Petersburg, Fla., said a bank that increases debt to buy back shares would score well in MVA. That strategy works well in periods of moderate- to low-interest rates, but could be disastrous when rates rise rapidly, he said.

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