Here today, gone tomorrow. Or maybe in two hours. That's market capital. But is that any way to judge a bank?For those who believe that banking companies have an inherent worth, one not tied to the whims of investors but based on a more tangible reality, the answer is not market capital but book equity.
On that basis, five banks stand out among the nation's hundred largest commercial banking companies: Silicon Valley Bancshares of Santa Clara, CA; Firstar Corp. of Milwaukee; National Commerce Bancorp in Memphis; Synovus Financial Corp. of Columbus, GA, and Provident Financial Group of Cincinnati, OH. U.S. Banker calculated its rankings based on data provided by SNL Securities of Charlottesville, VA.

The top-ranked companies have good earnings and super equity strength that enables them to make bold moves if they so choose and gives them a fortress-like balance sheet to withstand any ill winds.

"Growth in equity will always be important," says David Moffett, chief financial officer of Milwaukee-based Firstar Corp. "It provides a cushion against bad times, it reduces volatility of earnings and it enhances your ability to make acquisitions under purchase accounting."

That view, however, isn't very popular in today's market. "Building equity internally is almost a negative," says Kenneth F. Puglisi, an analyst with Sandler O'Neill & Partners, a New York-based investment banking firm. "When capital grows, it makes it harder to hit return-on-equity goals," and ROE is what investors care about, he says.

In the current environment, where earnings and capital structures are strong, credit analysts, not investors, are those most concerned about equity growth, Puglisi adds.

Whether or not investors appreciate it, equity growth underscores how well a bank is doing. Firstar scored the highest growth in equity during the 1996 through 1999 period, 638%, primarily because of several large acquisitions--its asset size doubled twice over the period. But all its acquisitions were immediately accretive, bolstering earnings and the company's equity accounts despite increases in dividends and substantial stock buyback programs.

Firstar's ROE for the 1996-1999 period averaged 16.1%, while its equity/asset ratio averaged 8.7%, well above the 7.6% median for the group. Adjusting the ROE in terms of the median, its average ROE would have been 18.4%. Moffett says that Firstar's ROE has been growing sharply since, and that it currently is about 23%. The company's goal is a 20% minimum.

Like Firstar, the other top-placed companies on U.S. Banker's ranking from an equity perspective produced the highest combination of growth in equity and return on average equity over the 1996-1999 period.

While some are loved by investors --Silicon Valley and Synovus sport relatively high price-earnings ratios--others are just average stock market performers. The recent price of Synovus was 20.3 times expected 2000 earnings, while that of Silicon Valley was 17.7. In contrast, the stock prices of Firststar and National Commerce (which recently merged with CCB Financial Corp. of Durham, NC) recently were about 13.9 times expected 2000 earnings, somewhat but not dramatically higher than the group average of 12.5.

For the purpose of the rankings, each bank's return on equity was adjusted so that its equity-to-asset ratio equaled the median. Banks whose equity was above the median had their ROAE ratios adjusted proportionately higher, and those whose equity-to-asset ratios were below the median had their ROAE's adjusted lower.

The No. 1-ranked Silicon Valley is driven by spectacular earnings. Its primary business is serving California-based technology companies, which park their newly raised equity capital in the bank, and uncomplainingly pay high rates and fees to a bank that diligently caters to their needs. Moreover, Silicon Valley often acquires warrants in these companies as part of its business, and many of these warrants produce huge returns when sold.

Westamerica Bancorp. of San Rafael, CA, and Riggs National Corp. of Washington, DC, had the worst records in terms of equity growth. Their equity fell by 20.7% over the four-year period. Riggs ranked 99th in total score, not only reflecting the shrinkage of its equity, but also a low return on equity and a below-average equity-asset ratio. Its e/a ratio stood at 5.8% for the period, well below the median. Its average ROAE for the four years was 12.7% for the period, which dropped to 9.7% when its equity/asset ratio was brought up to the median.

In contrast, Westamerica came in 74th in the rankings despite the sharp decline in its equity accounts. That's because its equity-to-assets ratio, at 7.7%, was a tad above the median and its ROAE for the period was a very respectable 17.7%, adjusted.

Joe Bowler, Westamerica's treasurer, says that the decline in equity resulted from large stock buybacks in recent years. "We had excess capital," he says. Despite the shrinkage in its equity, Westamerica reamins well capitalized in relation to its peers.

Asked why Westamerica didn't hold on to the excess equity and use it to support more growth, especially in the quickly growing California market, Bowler says, "We're cautious about how we grow."

Bowler says that Westamerica has been growing its loan portfolio at about half the rate of other banks--"We haven't been as adventurous." He believes that an economic downturn is possible, and, he adds, "We're very selective about our growth."

Meanwhile, National Commerce, based in Memphis, which recently completed its merger with CCB, has always been a powerhouse. A specialist in supermarket banking, it has a long history of top-notch earnings and a strong capital structure.

"At the end of the day, integrity of the balance sheet is the beginning of what drives the income statement," says Thomas M. Garrott, National Commerce's chairman and chief executive officer.

The company's business has been growing quickly enough to support a healthy growth in its equity accounts while producing a relatively high return on equity. On an unadjusted basis, its average return on equity was 21% for the 1996-99 period, among the top five.

On the other hand, North Fork Bancorp of Melville, NY, which is in the midst of a fierce hostile bid to take over New York's Dime Bancorp, and which boasts one of the highest average returns on equity in the business, is fairly short on capital. Its equity grew by only 1.5 percent in the 1996-1999 period, and at the end of last year its equity-to-asset ratio stood at only 5.1%, well below the 7.6% group median. It ranked 89th in equity growth, and because of its low equity/asset ratio, its ROAE was adjusted downward to 15.1%, from 22.4%.

The relative weakness in its capital accounts helps explain why North Fork sought financial support from Fleet Boston Financial Corp. in the New York bank's effort to take over the Dime. Fleet Boston agreed to inject $250 million into the deal. Fleet Boston is well capitalized, placing 11th on the equity-perspective ranking.

The Dime, itself, is not particularly well capitalized, with a yearend equity/asset ratio of only 6.34%, below even the thrift median of 7.28%. But at least the thrift showed better growth than North Fork in equity, 48%, over the four-year period.

The 25 largest thrifts proved a mixed bag. (The thrift ranking appears on our web site, www.us-banker.com.) Golden State Bancorp took the No. 1 spot, but that was largely because of an extremely weak equity base, only 2.74% of assets, compared with a median for the thrift group of 7.28%. And that was after a dramatic 810% increase in equity over the four-year period, the highest of the group.

Second-ranked Staten Island Bancorp of New York, was in the opposite position. By most standards, it is overcapitalized, with equity representing 12.73% of assets. Its average return on equity was a meager 9.16% for the four-year period. If its equity/asset ratio had been at the median, its ROAE would have averaged 16.02%.

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