Downdrafts in the stock market aside, most of the nation's top banks are increasing shareholder value at record levels, according to an unconventional analysis.
Shareholders are receiving more bang for their buck because banks are managing capital better through buyback programs and cutting costs more effectively in recent mergers and acquisitions, said Charles C. Kantor, a vice president at Stern Stewart & Co.
Stern Stewart, a financial consulting firm in New York, measures such improvement through fairly new and somewhat controversial analytical tools called economic value added and market value added.
The new forms of analysis are best known as EVA and MVA.
EVA calculates the profitability of a company by subtracting the cost of capital. MVA-the more volatile measure-gauges market capitalization by subtracting invested capital.
"We would argue," said Mr. Kantor, "that MVA is more a measure of the future, and EVA, one of the past." But the measurements tend to correlate: As EVA rises, so does the MVA, Mr. Kantor explained.
Stern Stewart has applied both forms of analysis to industrial companies for 15 years but began focusing on financial institutions two years ago.
In 1995 a number of large banks were destroying shareholder value, Mr. Kantor said. However, in 1996 that changed.
According to this year's report, all 100 banks that were measured generated positive EVA and MVA in 1996.
The nation's top 100 banks generated $6.6 billion in EVA in 1996. The top five were Citicorp, which generated $1.1 billion in EVA; NationsBank Corp., $497 million; Norwest, $410 million; U.S. Bancorp, $382 million; and Chase Manhattan Corp., $373 million.
Mr. Kantor noted that Norwest, State Street Corp., and National City Corp. have been the most consistent producers of EVA in the last several years.
He said Wells Fargo & Co. ranked last among the 100 banks measured. The San Francisco company's difficulties in digesting First Interstate Bancorp. were the reason.
In this time of sweeping mergers "EVA is particularly important because it enables investors to examine leverage," said Mr. Kantor. Traditional measurement tools, such as return on assets, do not adequately take leverage into account.
Others agree. In the last year, EVA has been picked up by bank stock analysts at several major houses, including Credit Suisse First Boston and Smith Barney Inc. Renowned Goldman Sachs & Co. market strategist Abbey Joseph Cohen recently prepped her clients about EVA.
Critics of the unorthodox measurements say they do not reflect important factors for investors such as the recent decline in bank stocks.
But Matthew Lindenbaum, who heads up Basswood Partners, a financial hedge fund in Paramus, N. J., said that focusing on EVA lets investors evaluate a company itself and not just its stock price.
"When the stock market fell 554 points, that day of course I was nervous," said Mr. Lindenbaum. "But you have to separate between the stock and the economics of a company. If the economics are good, it will work out."
Mr. Lindenbaum said EVA is a structure that lets investors "see that more clearly."
