In the latest installment of a long-running industry debate, a Wall Street analyst is reasserting the once-familiar stance that bigger banks are not necessarily better banks.
Midsize banks are much more efficient than their larger counterparts, contends Sean J. Ryan of Bear, Stearns & Co., New York, citing data from the Federal Deposit Insurance Corp.
The bigger-is-not-better view once held sway in banking circles but lost favor in this decade, as mergers and acquisitions created impressive industry giants. Bigness and purported economies of scale won out.
But Mr. Ryan said midsize banks lead the industry in efficiency, return on assets and equity, and net interest margin, as well as in fee revenues as a percentage of earning assets.
Large banks still boast the highest proportion of noninterest revenue, he said, but midsize banks are gaining fast.
In the first quarter of 1997, Mr. Ryan said, fee revenues made up 43% of total revenues at the largest banks, compared to 33% for midsize banks. But by the third quarter of 1998, fee revenues had improved to 41% at midsize banks, compared to 42% for large banks.
"It is becoming increasingly difficult to avoid the conclusion that skill matters and scale doesn't," the analyst said.
Another industry analyst, Stephen Biggar at S&P Equity Group, said bigger institutions have traditionally shown themselves to be less nimble than smaller ones.
"There are benefits to size," acknowledged Mr. Biggar. "You can spread services and technology over a wider base.
"But at what point does a company become inefficient? We have not reached the point where diseconomies of scale are evident in the merger process, but that does not mean that they are not there."
Through the first three quarters of last year, banks with assets of $1 billion to $10 billion were the most efficient, said Mr. Biggar, also citing FDIC data.
During that time, banks in this group had an average efficiency ratio of 54.94%, compared to a 60.95% average efficiency ratio for banks with assets of more than $10 billion, Mr. Biggar said. Like golf scores, lower efficiency ratios reflect better performance.
But he cautioned: "You cannot look at the efficiency ratio in a static world. There are banks that have poor efficiency ratios but double their earnings. Clearly, investors should want the earnings and then an improving ratio."
Efficiency ratios of many money-centers and superregionals have likely been skewed upward because of the wave of consolidation in the first half of 1998. Restructuring charges hurt efficiency numbers of those banks in the third quarter.
Portfolio manager Jonathan Lee of Hollister Asset Management said he continues to believe that bigger companies are the future.
"As a rule, smaller banks are more efficient, but they are not more profitable," Mr. Lee said. "A small bank is not going to give you a derivatives hedging program, nor is it going to underwrite a bond issue for you."
"The question today is which institution can offer the easiest access and the cheapest costs," Mr. Lee said. "I believe there is still room for the $10 billion bank-but it will be more difficult for them to compete with these larger banks."
