How The Scores Were DeterminedEach company is ranked against the others for each of the time periods on its return on equity. Each company then is ranked against the others on EPS growth. The two scores are added together to get a final score. The lower the score, the higher the total rank.

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Profiles:

This has been the era for investment banks and credit card lenders. For the past five years, they have thrived more than any other type of banking company, racking up huge profits at breakneck speeds. Commercial banks, for the most part, have been left in the dust.Though FleetBoston Financial Corp. comes in second on the one-year ranking, no commercial bank made a top showing over the longer run. None, for example, is among the top five on the five-year U.S. Banker ranking based on return on equity and growth of per-share earnings.
The winners over the five-year time period, from 1996 through 2000, are three investment banks and two credit card lenders. Morgan Stanley took first place, Charles Schwab Corp., second, and Merrill Lynch & Co., third. MBNA came in fourth, and Capital One Financial Corp., fifth.

The rankings broken down by industry can be found here on our Web site.

Some banks were close runners-up. Pittsburgh's PNC Financial Services Group took sixth place on the five-year ranking, and FleetBoston Financial Corp. came in sixth.

The question is whether the investment banks and specialty lenders will continue to lead the pack. There is strong evidence that investment banking is falling behind, although well-run specialty lenders seem to be holding their own.

Investment banks clearly have run into hard times this year because of a dearth of merger and acquisition activity and the collapse of the technology market, which means fewer initial public offerings.

Hints of a severe slowdown in the investment banking area are evident in the rankings, which are based on yearend 2000 numbers. (The raw numbers were supplied by SNL Securities.) Schwab, which is No. 1 on the three-year ranking, and No. 2 on the five-year, dropped sharply to No. 35 on the one-year tabulation. That's primarily because its growth in per-share earnings was relatively poor. At 4%, it ranks only 56th in EPS growth.

Morgan Stanley, too, lost ground, dropping to the No. 8 spot on the one-year ranking, down from No. 3 on the three-year and No. 1 on the five-year.

But Lehman Brothers Holdings maintained its strong upward momentum through last year. It is No. 1 on the one-year ranking, up from No. 5 on the three-year, and No. 10 on the five-year. Unlike most other investment banks, Lehman CEO Richard Fuld Jr. says his firm is not cutting back on staff. "This is the opportunity to continue to grow," he said in an interview with U.S. Banker (see "Take Notice, It’s Lehman"). But Fuld acknowledges that it's "tough to say whether we can get the same ROE this year." Lehman's ROE in 2000 was 25% and its EPS grew 56%.

Some of the commercial banks that performed especially well did so in large part because of their investment banking units. FleetBoston, which is the highest-ranking commercial bank, was helped by the huge profitability of its Robertson Stephens unit, which focuses on high-tech companies.

"Everything came together last year," says Terrence Murray, FleetBoston's CEO (see "FleetBoston Relies on Diversity"). "We'd love to repeat it this year, but it doesn't look like it."

The most persistent winners are the specialty lenders, more specifically, the credit card banks. MBNA and Capital One are among the top five in all three time periods, and their success seems to be enduring.

Citigroup, although not among the very top, has been climbing rapidly, largely because it has a substantial presence in both investment banking and specialty lending. Its Salomon Smith Barney unit is among the nation's leading investment banks, and the company is huge in the credit card and consumer finance business. It does relatively little traditional banking. Its first-quarter 2001 earnings were down from the previous year mainly because of a $497 million decline in investment banking income.

Most of the other largest banks performed poorly. J.P. Morgan Chase & Co., the second largest banking company after Citi, ranks 83rd for the year, 62nd for the three-year period, and 49th for the five-year period. Morgan/Chase's steep slump last year largely reflected a 22.5% drop in EPS, partly because of a spectacular performance in 1999, when it reported about $1.4 billion in gains from equity investments in high-tech companies. Its ROE last year also was less than mediocre, at 15.1%, which ranked it 62nd.

Other very large commercial banks also fared poorly. First Union Corp., 10th largest of the 100 companies, ranks 96th, while Bank One Corp., ninth largest, ranks 99th.

On the thrift side, Downey Financial Corp. of Newport Beach, CA, and Cleveland's Charter One Financial are neck-in-neck as the top-ranked thrifts. Downey is No. 20 on the rankings of all financial companies, and Charter One is 21.The two have different strengths. Downey makes its money largely on adjustable-rate mortgages, while Charter One's forte is in consumer banking (see "Hard to Categorize"). Charter One also is moving into commercial lending to small and middle-market companies.The future is difficult to foretell. Many banks have invested heavily in investment banking, brokerage and wealth management. With the stock markets in bear territory, it is possible that none of these businesses will live up to the hopes that had been put into them. It remains unclear, however, what will take their place.

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