Bank of America (NYSE:BAC) has been through a lot in the seven years since the financial crisis, and almost all of it has been bad. Fines, investigations, and public relations snafus have become the norm.
There has been one notable bright spot though: the completion of the bank's cost-cutting initiative called "Project BAC." This program was a cornerstone of CEO Brian Moynihan's plans to right the bank and prepare it to compete in the post financial crisis world. Completed in the second half of 2014, the project was a major success and will save Bank of America approximately $8 billion in annual costs going forward.
Despite this success, Bank of America is still a pretty inefficient operation today. In the bank investing world, a specialty metric called the efficiency ratio is used to compare how well banks are controlling their costs and maximizing their productivity. The ratio is calculated with the following formula; a lower ratio is considered more efficient.
Using data from S&P Capital IQ and the FDIC, we can see that Bank of America's efficiency ratio is pretty bad. In the fourth quarter, the bank's efficiency ratio was 74.9%. That compares to the industry average from the most current Quarterly Banking Profile from the FDIC at 60.8% for banks with more than $10 billion in total assets.
That inefficiency is a big deal. It trickles through the entire organization, lowering returns, handicapping profits, and potentially increasing risk taking. For bank investors, there are better options out there. Here are five of note.
1. JPMorgan Chase
Being inefficient is not a result of being a large bank, despite the increased regulatory scrutiny and related expenses that go with that size. JPMorgan Chase (NYSE:JPM) is a great example of this.
For the fourth quarter, JPMorgan reported an efficiency ratio of 65%. By better managing expenses relative to revenue, JPMorgan was able to produce 58% more profit than B of A, and it did so with only 24% more assets.
2. Wells Fargo
Another mega bank on this list is Wells Fargo (NYSE:WFC), and it is included here because it reported the best efficiency ratio of all the mega banks for the period, at just 59%.
Using the same comparison as we did with JPMorgan, the strength of Wells' highly efficient business model becomes clear. Wells actually has 19% fewer assets than Bank of America, and yet it still produced a whopping 84% more profit.
That strong operational performance is the largest single reason the bank trades at a markedly higher valuation multiple than either JPMorgan or Bank of America. The market values Wells at 1.9 times tangible book value, versus 1.3 times and 1.1 times for JPMorgan and B of A, respectively.
3. U.S. Bancorp
As you begin looking at banks smaller than the mega banks, you start to find some institutions with incredible efficiency and returns. Arguably none are as impressive as U.S. Bancorp (NYSE:USB).
In the fourth quarter, U.S. Bancorp reported an efficiency ratio of 53.3%. The bank was able, thanks to that efficiency, to produce an impressive 1.5% return on assets on a trailing-12-month basis. Bank of America's returns on assets were hardly breakeven, at 0.2% over the same period.
4. Prosperity Bancshares
U.S. Bancorp, to be fair, is also a very huge bank even if it isn't considered a mega bank. Moving our focus to pure regional bank stocks can turn up some even more impressive efficiency ratios.
Prosperity Bancshares (NYSE:PB) is one such bank. The Houston-based lender reports $21 billion in total assets as of the fourth quarter, a tiny asset base compared to the other banks listed thus far. However, in terms of efficiency, Prosperity rules the roost.
For the fourth quarter, the bank's efficiency ratio was 40.8%. The bank's return on assets for the trailing 12 months was 1.5%, and it returned 9.75% on equity in the fourth quarter. The bank trades at an expensive 2.6 times tangible book value, particularly given the bank's heavy exposure to the oil and gas industry in Texas.
That said, this bank's fundamental operation is truly impressive. A short term decline in value due to oil prices could be a value investor's opportunity to buy on the cheap.
5. Signature Bank
Arguably the most efficient bank in the nation, Signature Bank (NASDAQ:SBNY) reported an efficiency ratio of 34.1% in the fourth quarter.
The bank accomplishes this -- and its 13.3% return on equity and 1.2% return on assets -- by running an old-fashioned community bank in the heart of New York City. New York's dense population allows the bank to grow and profit without an expansive (and costly) branch network. That advantage coupled with old-school cost discipline have propelled Signature to elite performance.
Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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