NEW YORK (
) - An analysis by
has identified the 10 large bank holding companies that have outperformed peers by reporting decent or better earnings through the worst credit crisis in generations.
Using data provided by SNL Financial, we started with the group of 62 U.S. bank and thrift holding companies with more than $10 billion in total assets as of June 30. We then isolated the ten holding companies that have posted returns on average equity (ROE) - based on earnings before extra items - of greater than 7% for the full years 2005 through 2009, and for the first half of 2010.
As we saw in
Bank of Hawaii
(BOH - Get Report)
, a very strong industry performer will shoot for an ROE of 20%, but during 2009 a 7% ROE wasn't too shabby, as most banks saw their earnings dip as they took credit losses, boosted loan loss reserves, and suffered the effects of reduced fee income from transaction processing and loan origination.
The following are the 10 bank holding companies with ROE exceeding 7% from 2005 through the first half of 2010, ranked by ascending ROE so far this year:
10. FirstMerit Corporation
(FMER - Get Report)
of Akron, Ohio closed at $18.32 Friday, down 7% year-to-date. Based on a quarterly payout of 16 cents, the shares have a dividend yield of 3.49%.
For the first half of 2010, FirstMerit reported net income of $50.3 million, or $2.05 a share, increasing from $44.9 million, or 46 cents a share, a year earlier. The company's ROE for the first half of 2010 was 8.34% and over the previous five years peaked at 14.05% in 2007.
According to SNL, FirstMerit's net interest margin - the difference between the average yield on loans and investments and the average cost of funds - was 4.03% for the second quarter, increasing from 3.55% a year earlier and moving in line with the industry trend in the low interest rate environment.
FirstMerit had $14.5 million in total assets as of June 30 an increase of 36% from a year earlier. The company has acquired two failed institutions in the Chicago area during 2010, including
Midwest Bank & Trust
of Elmwood Park, Ill. in May and
George Washington Savings Bank
of Orland Park, Ill. in February. The
Federal Deposit Insurance Corp.
agreed to cover 80% of losses on the majority of assets acquired. In February, FirstMerit also acquired 24 Chicago-area branches from First Bank of Creve Coeur, Mo.
To support its expanding balance sheet, the company raised $320 million through the sale of common shares to Credit Suisse Securities (USA) LLC, RBC Capital Market Corporation and Sandler O'Neil & Partners, L.P.
FirstMerit's Tier 1 leverage ratio was 8.00% and its total risk-based capital ratio was 12.48% as of June 30. These ratios need to be at least 5% and 10% for most banks to be considered
The company's tangible common equity ratio was 7.34% as of June 30, according to SNL. While this ratio is not a standard regulatory capital ratio, investors and analysts have been focused on tangible common equity since it excludes preferred and trust-preferred equity and also excludes intangible assets such as goodwill. Many analysts consider 7% to be a good benchmark for the tangible common equity ratio for a profitable bank.
Nonperforming assets - including loans past due 90 days or more or in nonaccrual status (less government-guaranteed balances) and repossessed real estate - comprised 1.35% of total assets as of June 30. In comparison, the combined "noncurrent assets" ratio as of June 30 for all U.S. banks was 3.31% according to the FDIC.
The annualized ratio of net charge-offs (loan losses less recoveries) to average loans for the first half of 2010 was 1.10%, compared to the national aggregate charge-off ratio of 2.74% reported by the FDIC.
The shares trade for 1.9 times tangible book value according to SNL Financial. For all ten of the companies discussed here, the price-to-tangible-book ratios may appear high in a market where roughly 2/3 of bank stocks (excluding those trading on the Pink Sheets) trade below book value, however, most of those companies don't have earnings track records anywhere near as consistent as this group.
Based on the consensus estimate of $1.41 per share in earnings for 2011 among analysts polled by Thomson Reuters, FirstMerit's shares trade for 13 times forward earnings. Based on the 2012 consensus earnings estimate of $1.75 a share, the forward P/E would drop to 10.5.
Out of 13 analysts covering FirstMerit, four rate the shares a buy, while nine recommend investors hold the shares.