Profitability, capital strength, credit quality - these eternal verities were as important as ever in U.S. Banker's performance ranking of the 100 largest banks. First place this year, as in 1993, goes to Cincinnati's Fifth Third Bancorp.

[Expanded Picture]The French phrase plus ca change, plus c'est le meme chose fit banking especially well in 1994. The more things changed in the industry - particularly the huge rate run-up driven by the Federal Reserve's efforts to stay ahead of inflation - the more it became apparent that the ranks of America's top banks haven't changed much.

Another way of looking at it: Cream rises to the top. After a confounding and frequently terrible year in the financial markets, serious scares from derivatives and mounting, sometimes feverish competition for loans, the top group of banks in U.S. Banker's annual performance ranking of the 100 largest banking companies looks a lot like it did last year, and the year before.

Fifth Third Bancorp, which finished fifth last year, recaptured the top spot it had won in the 1993 rankings. "It's a solid, solid company," says David S. Berry, research director at Keefe, Bruyette & Woods, the New York investment banking firm that compiled the data for U.S. Banker (for a summary of the scoring formula, see explanation on page 27). "It's just a wonderful company," echoes Mike Milunovich, an analyst with Robert Baird & Co. in Milwaukee.

Seven of the top 10 in this year's rankings, including Fifth Third, were also in last year's exalted 10: MBNA Corp., Firstar Corp. (they finished second and third, respectively, the same as last year); Synovus Financial Corp., Signet Banking Corp., Wilmington Trust Corp. and First Virginia Banks Inc.

Vaulting into the top group in 1994 were Wachovia Corp., long a paragon of rectitude in American banking, and Worthen Banking Corp. Worthen, the Little Rock bank that is being sold to Boatmen's Bancshares of St. Louis, didn't score outstandingly well in any one category but was solid in virtually all. For Wachovia, it marked a return to the top group from a relatively low 25th showing last year.

Fifth Third has more than doubled in size in the past five years but has most of its operations within a few hours' drive of its Cincinnati headquarters. Executives credit the area's diversified manufacturing base for a certain measure of the bank's success, but there's a lot more to it (see "Fifth Third, the 'Charlie Hustle' of Banking," page 24).

The fact that two unconventional companies, MBNA and Synovus, made the top four will surely rankle people in the more traditional banks, MBNA, which finished second in 1994 as well, is the country's premier credit card bank, and Synovus earns a good chunk of its revenue processing credit card transactions. But both are chartered as commercial bank holding companies, and KBW and U.S. Banker have agreed that they should be included in the rankings.

[Expanded Picture]Wachovia scored especially well with its particular strength: credit quality. It ranked seventh on non-performing assets, which stood at a bare 0.39% in 1994. Year in and year out, the Winston-Salem, NC, bank posts extremely low loan-loss and chargeoff numbers, and that appears to be continuing under chief executive L.M. "Bud" Baker, who took over in January 1994 from industry legend John Medlin.

Repeaters at Bottom, Too

Like the top banks, quite a few of the bottom-dwellers are repeaters: Union Bank, Shawmut National Corp. and UJB Financial Corp. were all in the bottom 10 last year as well. Ironically, last-place OnBancorp, the Syracuse-based regional bank, scored highly several years ago in a separate USB ranking when it was a thrift company. But OnBancorp had a dreadful year, finishing dead last in ROE and percentage of fee income.

Shawmut, which is preparing to merge with Fleet Financial Group, wasn't in the bottom 10 in any category but was in the lowest quartile in everything except fee rank, where it came in 57th.

Looking at the survey's individual ranking criteria, only in the credit quality area did medians improve in 1994 over the year before. ROE was basically the same, and core ROA dipped slightly, as did the percentage of fee income to total revenues. But non-performing assets and reserve coverage ratios both improved significantly.Best Earners Rank Bank % ROE 1 MBNA Corp. 32.702 Citicorp 23.453 Midlantic Corp. 23.134 Wells Fargo & Co 22.435 First Interstate Bancorp 21.556 Norwest Corp 21.117 Wilmington Trust Corp. 20.848 First Tennessee National 20.049 Valley National Bancorp 20.0310 Michigan National Corp. 19.5011 KeyCorp 18.8712 Zions Bancorporation 18.8113 First Bank System Inc 18.6914 Fifth Third Bancorp 18.6015 Bank of New York Co. 18.4316 Southern National Corp. 18.3517 Integra Financial Corp. 17.9518 Premeir Bancorp Inc 17.6319 State Street Boston Corp. 17.5420 Synovus Financial Corp. 17.51

Surveys like this tend to favor smaller, regional companies and those with successful non-traditional fee businesses. The nation's largest banks tend to be well down the list; in fact, the 10 largest are all in the bottom half. Some of the big New York banks rank highly in a few categories but don't present the balance of the top scorers.

Banks with a wholesale focus, such as J.P. Morgan & Co., Bankers Trust New York Corp. and State Street Boston Corp. fared relatively poorly, as has generally been true in past U.S. Banker rankings. While these banks frequently have sterling ROE numbers and rank near the top in generating fee income, their other numbers rarely shine.

Highly regarded as they are, especially by investors - though Bankers Trust has been buffered by turmoil lately as a result of its derivatives business - these banks don't prosper under criteria that put considerable weight on earnings power and capital strength, common standards of bank analysis. Morgan finished fifth in the fee category, for instance, but that was effectively nullified by its 98th-place showing in core ROA.

[Expanded Picture]Citicorp, which finished 56th, was the highest-scoring of the top 10. The nation's biggest banking company has been on something of a roll, and its ROE of 23.45% was topped only by MBNA. Last year, Citi finished 83rd.

Were it not for its 100th-place showing - dead last - in the reserve category, MBNA would have strolled away with top honors. It finished first in the ROA, ROE and non-performers-to-assets categories; no other bank had more than one first-place finish. Executives there steadfastly maintain that MBNA takes deposits, makes loans and does many of the other things a conventional bank does.Top Fee Income Producers % Fee incomeRank Bank Total Revenue 1 State Street Boston Corp 71.512 Bankers Trust New York 65.673 MBNA Corp. 65.514 Northern Trust Corp. 61.815 J P Morgan & Co. Inc. 61.536 First Chicago Corp. 56.957 Mellon Bank Corp. 51.888 Signet Banking Corp. 51.879 Synovus Financial Corp. 49.6410 First Tennessee National 48.8311 Citicorp 45.8212 Chemical Banking Corp. 42.9113 Chase Manhattan Corp. 42.6214 Marshall & Ilsley Corp. 42.3115 UMB Financial Corp. 41.8416 Bank of New York Co. 41.5317 National City Corp. 39.6518 Norwest Corp. 37.7519 Wilmington Trust Corp. 37.1620 Cullen/Frost Bankers Inc 37.12

Since MBNA securitizes most of its credit card loans, it generates returns not tied to the balance sheet, and those can be stratospheric; the 32.7% ROE it generated in 1994 was up 260 basis points from the year earlier and nearly 10 percentage points higher than that of second-place Citicorp. And because it doesn't have a branch structure, overhead is exceptionally low.

Columbus, GA-based Synovus moves up from eighth place last year. Like MBNA, it was hurt by a low reserve ranking, but it notched high numbers in the other categories. Actually, Synovus is practically two companies joined at the hip: a commercial banking operation led by Columbus Bank & Trust Co., and Total System Services, a credit card services concern 81% owned by the holding company. Revenues at TSS grew 23% in 1994, and loans expanded by 13%.Highest Safety NPA/Ln+ Reserve/Rank Bank ORE(%) NCOs 1 Provident Bancorp 0.25 92.33x2 First American Corp. 0.43 -47.073 Northern Trust Corp. 0.35 21.614 First Security Corp. 0.33 18.875 Union Planters Corp. 0.42 23.706 First Commercial Corp. 0.51 45.927 Compass Banschares 0.33 13.268 Bancorp Hawaii Inc. 0.69 1108.278 BB&T Financial Corp. 0.41 11.499 Commerce Banschares Inc. 0.42 11.7010 Worthen Banking Corp. 0.52 16.3110 First Citizens Banschares Inc. 0.65 39.4211 First Commerce Corp. 0.55 17.4312 Fifth Third Bancorp 0.27 8.9313 Marshall & Ilsley Corp. 0.69 33.8713 One Valley Bancorp of WV 0.41 9.7614 Trustmark Corp. 0.70 23.3414 First Virginia Banks Inc. 0.52 11.9115 Southern National Corp. 0.44 9.67

The bank unit has a presence in Georgia, Alabama, Florida and now South Carolina following the purchase of $1-billion-asset NBSC Corp. in a deal that closed at the end of February. "The company benefits from its position as the leading community bank with little in the way of deposit-pricing competition in many of its markets," noted J.C. Bradford & Co. analyst Henry J. Coffey in a recent research report.

The TSS unit processes 44.5 million credit card accounts for more than 4,000 issuers in 35 states, says Synovus CEO James H. Blanchard. The business continues to grow, and accounts for 20% of holding company revenues. "We have a fee income stream that's significantly larger than most banking organizations have," Blanchard says.

On the banking side, Synovus has 33 banks in the four states; Blanchard says success stems from having a highly decentralized framework backed by strong financial controls at the holding company level. "The decentralized approach gives us focus in our individual communities. Almost all of our banks are growing share in each of their communities," he says, and loan growth has outstripped the norms in those market areas.

Big Gains Recorded

Comparing this year's rankings with last year's, several banks have advanced in a big way. New Jersey's Midlantic Corp. was almost counted for dead a few years ago, but after a dramatic shrinkage and re-engineering on the cost side, Midlantic climbed to 46th, all the way from 97th last year and 98th on the 1993 list. Much of the gain came from its sterling ROE of 23.13%, which ranked third.

Another big gainer was Bank of New York Corp., which shot up 50 places, from 71st in 1994 to 21st this year. It did especially well in the earnings categories and in fee income, but was hurt by a very low reserve ranking.

The advances by Midlantic and Bank of New York owe something to the rebound of the Northeast economy; in general, a relatively robust economy around the country didn't give a disproportionate lift to any region. Only in hard-hit California have business conditions been below average, yet Wells Fargo and First Interstate Bancorp both scored in the top 35.

At Milwaukee-based Firstar, chief executive Roger Fitzsimonds cited the strength of the regional economy as one factor in its repeat third-place showing. "Loan growth has been running at 6% to 8% annually, and last year it was north of 10%, and we expect that to continue," he says. With that, asset quality has been "about as good as it gets."

Similarly, strong growth in the Southeast has helped Synovus, Blanchard contends. "At least for the '90s, we feel we're in the best part of country," he says. "All four of our states are thriving."

[Expanded Picture][Expanded Picture]At sixth-ranked National City Corp., headquartered in Cleveland, chairman and CEO Edward B. Brandon says basic banking drove much of its '94 success. "Our banking business went over plan, in large part because of our ability to maintain margins at 20 basis points better than plan and to grow assets as good as plan." Moreover, he adds, "earning assets are reporting nice gains, and margins are acting very decently."

Nonperforming assets were down to 59 basis points, putting the bank just off the top quartile. "I don't think I've seen loan quality this good in my career," Brandon muses. Calling the company "conservatively managed and astute," Advest analyst Frank J. Barkocy forecasts continued loan growth improvement and modest gains in fee income, including double-digit growth in National City's item-processing business.

Several smaller tables on these pages break out high scorers in individual categories. With the current hand-wringing on loan pricing, the table on safety takes special importance; here, it combines the non-performing assets ratio with the reserve coverage ratio. Provident Bancorp, a Cincinnati rival to Fifth Third, proved it has been provident indeed, topping the ranking, with Tennessee's First American Corp. second.

Bankers themselves are openly voicing concerns about loan pricing and risk. "One of the challenges we're working on is making sure we don't ease up on underwriting standards," says Fitzsimonds, adding that pricing has been very competitive. "We're having some difficulty from that standpoint, but we're willing to keep those standards up."

Brandon says there's mounting evidence from around the country that underwriting standards are being undermined. "There's no question that we (at National City) have loosened. Perhaps ours were too tight coming out of the last cycle."

Pricing Deterioration

He adds: "Pricing stinks, and it's getting worse. There is enormous pressure in indirect auto lending; in some markets, it's priced down almost to funding costs. To think you can operate that business without losses is Pollyannish."

Fortunately for the industry, pricing deterioration is occurring while most banks are well-capitalized. It's not possible to make meaningful year-to-year comparisons on capitalization since the benchmark for this year's ranking was changed from Tier One capital to the leverage ratio. But in a persistent trend last year, a great many banks reduced their equity capital through stock buy-back programs (U.S. Banker, January 1995).

A tough revenue environment made it increasingly difficult for most banks to carry so much equity capital and still deliver a high rate of return to shareholders. Thus by reducing the number of shares outstanding, they actually increased their earnings per share.

Not everyone found this deleveraging process to be necessary, however. Fifth Third delivered its 18.6% ROE despite a leverage ratio of 9.62 - sixth highest on this year's ranking. CEO Schaefer agrees that its ROE would be even higher if Fifth Third carried less capital, but he prefers the freedom that an extra strong balance sheet provides. "It gives us a lot of flexibility when we do an acquisition," he explains.

Cost-control efforts have been a mantra at many large banks for the past few years, and all signs point to that continuing. "Our challenge is to continue to hold the line on expenses," says Fitzsimonds. Firstar's efficiency ratio has been pared to just over 60%, but he says executives realize that it needs to come down farther, to the mid-50s. Even that would be way over levels at Fifth Third, which is in the mid-40s.

Listening to the CEOs at some of the top banks, it's clear they're not willing to rest on their laurels.

Synovus' Blanchard says that modernization and "product throughput" are two major initiatives this year. "Modernization involves an internal effort to evaluate our processes and ask if we were starting this today with a $7.2-billion company, would this be the best way to do it, or are we doing it in ways that have pretty much simply evolved? We want to significantly change a lot of our processes, all within a decentralized framework."Leverage Ratio Rank Bank Ratio % 1 Mercantile Bankshares 12.13 2 First Maryland Bancorp 11.05 3 First Virginia Banks 10.25 4 Signet Banking Corp. 9.90 5 Dauphin Deposit Corp. 9.65 6 Fifth Third Bancorp 9.62 7 Midlantic Corp. 9.43 8 MBNA Corp 9.36 9 Commerce Bancshares 9.2910 Hibernia Corp. 8.9211 Synovus Financial Corp. 8.9012 Keystone Financial 8.8413 Citizens Bancorp 8.8414 Trustmark Corp. 8.8115 First Bancorp of Ohio 8.7416 Mellon Bank Corp. 8.6717 Wachovia Corp. 8.6318 One Valley Bancorp of WV 8.6219 Old National Bancorp 8.6020 Firstar Corp. 8.58

On the product side, adds Blanchard, "we want to uniformly drive products through our entire distribution system" to enhance fee income.

National City's Brandon says that while its bank units are doing just fine, "parts of the company are operating less well. We've got a lot to do in trust and in the mortgage business. There's a lot we can do in 1995."



RELATED ARTICLE: The U.S. Banker Ranking Formula

As it did last year, U.S. Banker teamed up with the New York investment bank Keefe, Bruyette & Woods to structure a formula that aims to determine overall excellence in a banking franchise. The resulting ranking elevates banks that are both strongly capitalized, strong earners and good credit managers. Not surprisingly, many of the top banks on the list are perennial analyst favorites.

[Expanded Picture]Once again, we selected six basic criteria to measure capital strength, asset quality, earnings performance and revenue mix in 1994 for the 100 largest banking companies. All data reflects year end numbers.

This year, the standard for capital strength is the leverage ratio, defined as the ratio of shareholders' equity less goodwill and unrealized securities gains divided by average tangible assets. This represents a change from last year's ranking, which used the ratio of Tier 1 capital to risk-adjusted assets, and tends to penalize banks with significant amounts of goodwill generated by premiums paid for acquisitions.

And unlike last year, when capital was double-weighted in the scoring, it has been given no more weight than any other category. Capital ratios have declined somewhat in the past year as it has become clear to many that some banks are, if anything, overcapitalized. Many strong banks have launched stock buyback programs in recent months, believing that one of the best uses for that capital is investment in their own stocks.

U.S. Banker also incorporated two measures of credit quality in the formula. The non-performing assets ratio is defined as non-accrual loans plus restructured loans plus foreclosed assets, divided by total loans plus foreclosed assets. In addition, reserve coverage of net charge-offs serves as a basic measure of reserve adequacy relative to actual loss experience, and is derived by dividing year end reserves by full-year net chargeoffs. In a few isolated cases, net chargeoffs were a negative number, when money wasn't charged off but added to the balance sheet.

To measure profitability, U.S. Banker looks at two recognized standards. One is return on equity, the most basic measure of profitability from a shareholder perspective.

The second used a refinement of the standard return on assets. This "core ROA" measures operating revenues minus operating non-interest expense divided by average assets. (Operating revenue is net interest income and total non-interest income less securities transactions and non-recurring items. Operating non-interest expense equals total non-interest expense minus foreclosed property and non-recurring expense.)

The sixth and final element of the formula measures a bank's revenue mix, the proportion of operating non-interest revenues to total operating revenues, excluding securities gains and non-recurring items. This recognizes that non-interest income is a key generator of earnings in good and bad times - and can be a powerful counterweight to credit problems.

After all these ratios were determined for each bank, the banks were ranked against one another in each category. How each bank ranked in each category was then totaled to create the composite score. Ties were broken by ROE scores.

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