Big banks have warned of massive charges to their fourth-quarter earnings thanks to the recently passed tax law. Banks are writing down the value of tax-deferred assets (DTAs) on their balance sheet because of changes to the U.S. tax code. Bank of America said it would take a $3 billion hit to its quarterly earnings primarily as a result of DTA writedowns. The tab at Citigroup for DTAs: $16 billion.
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But banks are happy to trade the short-term pain for long-term gain. “Tax reform … will be very, very beneficial to us,” said Comerica CFO David Duprey at a recent conference. Banks typically pay among the highest income tax rates of any industry, and the drop in the corporate rate from 35% to 21% will boost the bottom line going forward.
It is a good time overall for the banking industry. Earnings are at record levels. Interest rates are creeping up, with the Federal Reserve expected to hike rates at least three times in 2018 (higher rates boost profits as banks make more from lending). Default rates and unemployment remain low. “The industry and certainly the big banks are in good shape,” says Chris Vanderpool, senior analyst at S&P Global Market Intelligence. “Banks are in a healthy capital position, and we haven’t seen any red flags in terms of credit quality.”
But not all banks are created equal. With that in mind, Forbes enlisted S&P Global Market Intelligence for data regarding the growth, credit quality and profitability of the 100 largest banks and thrifts by assets. The result: America’s Best Banks 2018. The 10 metrics used in the rankings are based on regulatory filings through September 30. The data is courtesy of S&P, but the rankings are done solely by Forbes (click here for a detailed methodology and a complete ranking of the 100 banks).
The top-ranked bank this year is Conway, Arkansas-based Home BancShares. The $14-billion-in-assets bank has 172 branches in four states with a significant presence in the Florida Panhandle. It scores among the top six banks for return on average total common equity (16.2%), return on average assets (1.5%), net interest margin (4.7%) and efficiency ratio (42%).
Home BancShares launched in 1999 and operates under the Centennial Bank brand. It has made 22 acquisitions, with the latest, Stonegate Bank, closing in November. “We are an opportunistic acquirer,” says John Tipton, Home BancShare’s chief operating officer.
Tipton says the bank took over more FDIC-assisted banks than any other bank in the U.S. between 2010 and 2012, when many banks were circling bankruptcy due to the financial crisis. “We were one of the selected banks that had the capital and balance sheet strength to take over these banks,” says Tipton.
Phoenix-based Western Alliance Bancorp moves up two spots this year to rank second overall. The bank scores well for its return on average assets and net charge-offs as a percent of average loans. With a focus on Arizona, Nevada and California, the bank was hammered by the collapse of the subprime mortgage market. The stock bottomed at $3 a share in 2009 but has rebounded to top $58.
Rounding out the top five banks are Bank of the Ozarks, First Merchants and East West Bancorp.
America’s four banking giants have $8.7 trillion in assets. By comparison, the fifth-biggest bank, U.S. Bancorp, is only one quarter the size of fourth-ranked Citigroup. The performance of the Big Four was mixed on America’s Best Banks 2018. The country’s biggest bank, JPMorgan Chase with $2.6 trillion in assets, led the way for the second straight year at 40th, up from No. 57 last year. Citigroup ranked 69th, followed by Wells Fargo at 74 and Bank of America at 85. Wall Street values Citigroup the lowest, with its stock trading at just 0.9 times book value.
Wells Fargo was the only one of the Big Four to fall in the rankings (it ranked 63rd in 2017). Wells continues to struggle with the fallout from its fake accounts scandal, with an additional 1.4 million fake accounts discovered in August. One bright note for the troubled bank: It is expected to be the biggest beneficiary of the new tax law, with earnings up 18% since most of its earnings are in the U.S., according to a Goldman Sachs analysis.
Santa Ana, California-based Banc of California is last this year among the 100 banks. It fell near the bottom in multiple categories, including return on average assets (0.7%), efficiency ratio (86%), operating revenue growth (-18%) and reserves as a percent nonperforming assets (51%).
“The metrics highlighted here present a backward-looking and incomplete picture of our performance. We are confident that our growth plan backed by our brand, scale and talented team can produce strong returns in 2018 and beyond,” says a bank spokesman.
The bank raised its profile last year with a 15-year, $100 million deal to put its name on the stadium of MLS expansion franchise Los Angeles FC, but the ensuing 16 months included layoffs, an investigation by U.S. regulators and the resignation of CEO Steven Sugarman. The stock plummeted more than 50% over two months before recovering much of the losses in 2017.
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