Since the financial crisis, many bank analysts and commentators, myself included, have focused on the sector's progress at working through the seemingly endless pile of toxic mortgages cluttering its collective balance sheet since the housing bubble burst.
While this continues to be a problem, as almost 700 banks remain on the FDIC's problem bank list, it now appears that this singular focus on soured mortgage portfolios should be replaced by a more well-rounded analysis of both profit and loss.
I say this for two reasons. First, data released earlier this week showed that third-quarter earnings in the banking industry were at a six-year high. And second, though perhaps more significantly, the year-over-year growth in profitability was fueled by an increase in net operating revenue as opposed to a decrease in loan loss provisions for the first time since the crisis.
What follows, in turn, is a list of the five most efficient regional banks as measured by the efficiency ratio, which is calculated by dividing noninterest expense by net operating revenue excluding loan loss provisions -- click here to see the five least efficient regional banks. As I discussed yesterday with respect to Citigroup, this figure tells us how much it costs a bank to produce every dollar of revenue.
|
Bank |
Efficiency Ratio (TTM) |
|---|---|
|
New York Community Bank (NYCB +2.89%) |
41% |
|
US Bancorp (USB +0.93%) |
51% |
|
Capital One Financial (COF +1.09%) |
57% |
|
Fifth Third Bancorp (FITB +1.68%) |
60% |
|
First Niagara Financial (NASDAQ: FNFG) |
60% |
|
Industry Average |
63% |
Sources: S&P's Capital IQ and the FDIC's Statistics on Depository Institutions.
As you can see, New York Community Bancshares is far and away the most efficient regional bank, spending an average of only $0.41, excluding provisions for loan losses, to generate every dollar of revenue. This is thanks largely to its quasi-commercial focus on financing multi-family properties in the New York City metropolitan area. The notoriously conservative lender US Bancorp comes in second, followed by the former credit card company Capital One. And finally, Fifth Third and First Niagara round out the top five, all of which perform markedly better in this regard than the industry average.
To provide some more context, here's a chart of these banks relative to the industry since the beginning of 2009. As you can see, while New York Community Bank's recent dominance isn't a fluke, as it's consistently outperformed the industry for the past three years.
Sources: S&P's Capital IQ and the FDIC's Statistics on Depository Institutions.
The Foolish bottom line
While bank investors should never rely on just one statistic to make an investment decision, factors like the efficiency ratio should always factor into the analysis. To learn about one bank that leads the industry in terms of efficiency, click on the following link to download our new, in-depth report on New York Community Bank.
