NEW YORK (TheStreet) -- During a time of historically low interest rates, narrowing margins and increasing regulatory burdens, efficiency is the name of the game for many banks.
A bank's efficiency ratio is, essentially, the number of pennies of overhead expenses for each dollar of revenue.
For Bank of America (BAC) -- saddled with very high mortgage loan servicing expenses as it works through the problem loans mainly inherited from the acquisition of Countrywide Financial in 2008 -- improving efficiency is a core strategy.
CFO Bruce Thompson in July touted the success of "Project New BAC," which is the company's multi-step initiative to trim noncore assets and cut expenses, saying that excluding "legacy assets and servicing," the company's "number of employees has come down from 253,000 to 233,000 or an 8% decline" from a year earlier, as of June 30.Thomson said at a conference on Sept. 10 that after adjusting for goodwill impairment write-downs and annual bonuses paid during the first quarter, "our expenses were down about $3 billion in the second quarter from the prior-year period and down about over $1 billion on a quarter-over-quarter basis." The Wall Street Journal reported in Wednesday that Bank of America was accelerating its job cuts, with 16,000 layoffs planned before the end of the year. According to Thomson Reuters Bank Insight, Bank of America's second-quarter efficiency ratio was 77.26%, improving from 87.16% the previous quarter. For the 12-month period ended June 30, the company's efficiency ratio was 75.55%. Banks aim to keep their efficiency ratios below 50%, while a ratio below under 40% is considered to be excellent. While a good efficiency ratio typically implies decent or better overall earnings performance, it of course isn't the whole story, as we have seen with Hudson City Bancorp (HCBK), which on August 27 announced an agreement to be acquired by M&T Bank (MTB), for about $3.7 billion. Hudson City for years had been among the industry's most efficient players. The Paramus, N.J., lender's efficiency ratio for the second quarter was 36.79%, climbing from 31.14% a year earlier. After two major balance sheet restructurings, after its long-tern leverage strategy of increasing wholesale borrowings and investing in securities backfired as interest rates declined, the company's second-quarter net interest margin -- the difference between the average yield on loans and investments and the average cost for deposits and borrowings -- was a very narrow 2.13%. Using data supplied by Thomson Reuters Bank Insight, we have identified the five actively traded banks -- with average daily trading volume of at least 40,000 shares -- with the best efficiency ratios over the past 12 months, excluding Hudson City Bancorp. All five names have seen strong year-to-date returns, while three of the banks also showed significant returns during 2011, when the KBW Bank Index (I:BKX) sank 25%. Here they are, by descending (improving) efficiency ratio:
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