To the Editor:
My thoughts on your Aug. 15 article "Just How Useful Is The Efficiency Ratio?"
Market forces and regulatory change have broadened the product line, indeed the definition, of banks. As each institution pursues its own niche, the banking community becomes less homogeneous. Analysts are dealt a tougher hand; they are left comparing unlike entities.
The example of PNC, with net interest income representing 36.99% of total, and New York Community, with 83.3%, certainly suggests that they are not comparable (as does their obvious size difference).
What is unclear is why the efficiency ratio is singled out. ROA and ROE are influenced, perhaps more directly, by an institution's product line, the asset and equity components of the balance sheet.
When all is said and done, in trying to compare peers it is best to begin with an accurate assessment of just who are truly peers.
I'd suggest though that it is not time to abandon the efficiency ratio. Consider:
o Your story suggests that New York Community had a very low efficiency ratio before buying Haven in 2000; it fell to 87th among all U.S. banking companies that year but was fourth in 2002 and has been among the top three since 2003.
In this example the ratio is invaluable in proving management's ability to deliver on acquisition-related (and no doubt promised) expense reductions.
o PNC, no fan of the ratio, has a goal of cutting $300 million in expenses. Notwithstanding Professor White's claim that even when comparing the same bank over time the efficiency ratio "does not make sense," how are analysts to measure PNC's success? As the business grows and the expenses are shed over 18 to 24 months, an analyst will never "see" the $300 million, but the efficiency ratio will reflect PNC's progress.
I own stock of a major bank with the following characteristics:
Enviable ROA and ROE; I wonder if there is a lesson here?John W. Nenninger
Cincinnati
Editor's Note: The author, a former senior vice president of finance at Security Pacific and of sales support at Star Bank who is now a private investor, says he owns no PNC or New York Community stock.
