The large and regional banks that outperformed their peers last year each have their own secret sauce — a carved-out niche, well-timed investments or strong management teams. Just don't look at their stock price.
As of early July, only two banks on American Banker's annual ranking of larger, top-performing institutions had their stock prices in the green this year. One was JPMorgan Chase, the largest bank in the country. (The second was Ally Financial, whose stock has recovered somewhat after a large plunge last year.)
JPMorgan's position is no surprise, given the dominance it showed when depositors at regional banks fled to it seeking safety during the crisis earlier this year. It also swooped to the rescue this spring by purchasing First Republic Bank after it failed.
Others on American Banker's list of top 10 performers with at least $50 billion in assets have faced rockier times.
Though it has hung on and kept depositors' faith, Western Alliance faced major doubts over its future as investors soured on regional banks out west. Worries over other top-performing banks haven't been nearly as dire, but they've nonetheless rocked their stock prices — as in the case of Dallas-based Comerica and Salt Lake City-based Zions Bancorporation.
The numbers speak to the tough reality facing the industry: Past results don't matter much when investors see broader troubles ahead.
"They've decided that the world has changed, so they've sold those top performers off," said Claude Hanley, partner at Capital Performance Group, the consulting firm that compiled the data for American Banker. "Investors are simply not emphasizing what these institutions have done in the past, and they're raising fundamental questions about the viability of their profitability."
The list of concerns is vast. Banks are paying more to keep depositors happy, limiting their profit margins going forward. Fears of a recession abound, even though the economy has largely outperformed expectations thus far.
Investors worry about trouble spots in bank loan portfolios, ranging from auto loans to office buildings that banks lent to before the pandemic. And yes, despite complaints from many bankers, investors have also worried about the large "unrealized losses" that
That has all prompted investors to look elsewhere. As of early July, the broader stock market was up some 14% this year, while the KBW Nasdaq Bank Index was down about 20%, even after recovering some losses from earlier this year.
Highfliers aren't immune
Few have gone through the wringer as much as the $71 billion-asset Western Alliance, which has seen its market value plunge.
The bank had a return on average equity of 19.7% from 2020 to 2022 — the metric used to determine the annual ranking — once again making it the top-performing lender in its asset class. Western Alliance's high returns are partly due to its 2021
Western Alliance declined to comment for this story.
"I think the management team is very well respected," said Jeff Davis, managing director of Mercer Capital's financial institutions group, crediting Western Alliance for its well-timed purchase.
But high returns didn't make Western Alliance immune from the fears that gripped the industry after the sudden failure of Silicon Valley Bank. SVB's rapid growth as the tech sector boomed put it at No. 2 on American Banker's top-performer list last year, though the risks it took to achieve those returns are now clear. The bank collapsed March 10 when its depositors panicked about the bank's financial footing.
The fears quickly spread to other banks with a tech focus, and to regional banks in the West. Western Alliance, headquartered in Phoenix, met that description on both counts, though it has a far more diversified deposit base than Silicon Valley Bank ever did.
Tech depositors accounted for many of the outflows at Western Alliance, whose deposits fell to $47.6 billion at the end of March, down sharply from $61.5 billion on March 9. But the picture had already stabilized by month-end, and the bank was growing deposits again by early April.
The figures "should alleviate concerns around the company's deposit base and liquidity position," UBS analyst Brody Preston wrote at the time.
Surviving came with some challenges. Headlines blared for weeks about whether it may be the next domino to fall. To help prevent that fate, the bank let some big depositors take a behind-the-scenes dive into the business as long as they agreed to not disclose what they learned, The New York Times
"People like confidence — they are looking to see if you're sheepish," Western Alliance CEO Ken Vecchione told The New York Times. "We matter. We aren't going anywhere."
To get through its rough patch, Western Alliance had to step up its borrowings and accumulate cash. That came at a cost — it was accompanied by rising interest expenses from paying depositors more.
Competition for deposits is here to stay
Retaining deposits is an industrywide challenge. At the start of last year, banks could afford to pay little to depositors, giving them cheap funding for their loans. But the Federal Reserve ratcheted up interest rates quickly as it sought to curb inflation, bringing its benchmark rate to just above 5%.
Higher rates enabled banks to charge more interest on their loans, but this also led to depositors asking for more interest on their cash.
That behavior accelerated after Silicon Valley Bank's failure, said Mercer Capital's Davis. With banks in the headlines, Davis said customers started "taking a closer look at what their bank was paying" and realizing they could get more interest in a money market fund.
"It sped up the process of deposits pricing up," Davis said.
Banks increasingly feel forced to meet those demands, particularly after SVB's failure prompted worry over banks seeing large deposit outflows. The median cost of funds in the first quarter was 1.71% for the top 10 banks, compared with 0.52% for the end of 2022, according to the Capital Performance Data.
The competition for deposits is unlikely to die down anytime soon, a factor that will
"It's going to dampen margins at many banks, and we've said we expect that to be the case here," Harris Simmons, CEO of the $88.6 billion-asset Zions Bancorporation, said in an interview. "So you respond by trying to really focus on cost control and making sure that you're pricing assets as they should be."
At $67.2 billion-asset East West Bancorp, executives positioned their balance sheet to be more asset-sensitive when interest rates were low, said Chief Financial Officer Irene Oh. That meant that when rates rose, its loans and other assets repriced upward, helping the Pasadena, California-based bank earn more money and offset the pressure of rising deposit costs. The bank came in at third in the top-performers ranking.
"Deposit costs will increase, sector-wide," Oh said. "East West is not going to be immune to that. With that said, I think we continue to see opportunities to onboard new customers."
High-quality lending
Deposit costs are one of the wildcards that may reshuffle next year's rankings, CPG's Hanley said. The other big one is credit quality — whether the loans banks made when times were good will actually be repaid if a recession hits.
It helps that banks have had an "awful lot of runway to prepare" for a downturn, Hanley said.
The much-feared recession hasn't arrived, with U.S. employers continuing to add jobs at a decent clip. But banks, fearing an eventual downturn, started tightening their underwriting last year and became pickier in the types of borrowers they take on.
"The institutions have been preparing for a long time for the eventuality of a deterioration," Hanley said, adding that "most of them are in a pretty good spot."
Credit quality was pristine for much of the pandemic. Consumers, for example, built up larger cash buffers thanks to stimulus funds and savings from staying at home. Many used that cash to pay off or pay down their credit cards and other debt, and banks' loan quality metrics were about as good as they've ever been.
Things started to "normalize" last year, with banks beginning to see late payments rack up again, and they are effectively now at pre-pandemic levels. At the end of 2022, the median nonperforming assets totaled 0.34% for the top 10 large banks and 0.41% for all banks with more than $50 billion of assets, according to the CPG data. Now the question is: Will things get a lot worse than they were before the pandemic?
At Ally Financial, whose business surged as Americans bought more cars in the pandemic, charge-offs have already surpassed pre-pandemic levels. The company's net charge-off rate was 1.2% in the first quarter compared to 0.73% at the start of 2019.
The auto lender, which was No. 8 on the top-performers list, has diversified into other businesses, including home lending, personal loans and credit cards.
But auto still makes up most of its business, and Ally
Another area rattling investors is office building loans and whether they'll start to sour as companies shift toward remote and hybrid work. There's a case to be made that the pain may be gradual, as leases will come due in the next few years and not all at once.
And not all office space is the same. Some buildings can be more easily shifted to include apartments — a segment of commercial real estate that's continued to perform well. Others are located in suburban areas, or in cities where the shift toward remote work is less visible than, say, San Francisco.
At Columbus, Georgia-based Synovus Financial, medical facilities have made up a significant portion of the bank's office portfolio. The $62 billion-asset bank is No. 7 on this year's list of top performers, up from No. 15 last year.
Its medical office CRE portfolio has remained "pristine," with little signs of any stress, Chief Financial Officer Andrew Gregory said last week. But the bank nonetheless decided to sell some $1.3 billion in medical office CRE loans, a move that frees up cash for paying off non-deposit borrowing and gives Synovus space to take on other business.
"The credit quality was so pristine that we were able to get what we believe was a very fair price for that portfolio," Gregory said. Overall, the company does not see "any specific industry or sector stress within our loan book," including its remaining CRE loans, he said.
Hope for bank stocks
For now, worries over banks have eased somewhat, though concerns remain around banks' loan portfolios, deposit costs and profitability. That's at least a more standard set of concerns compared with worries over some banks' survival.
Many generalist investors — perhaps soured by their investments in Silicon Valley Bank and First Republic going to zero — are largely continuing to shun bank stocks. But the recent rebound in bank stocks suggests the industry, or at least those with solid businesses, are turning the corner.
"The fundamental earnings and the strengths of franchises is something that, over time, they'll realize and come back," East West's Oh said. "A little bit of that has happened."
Simmons, CEO of the 10th-ranked Zions, said the bank has been "doctrinaire" in how it manages its risks. It's been growing at a measured pace, it's been conservative in its underwriting and it's focused on small- and medium-size businesses, whose deposits are more reliable. He is not complaining about his company's stock price, noting there's a "strong tradition of CEOs arguing that their stocks are underpriced" that he finds "tiresome."
"If you think they're underpriced, then you ought to be out buying them. I have," Simmons said.