NEW YORK (
) -- Five large-cap U.S. banks have shown double-digit compound annual growth in tangible book value per share over the past three years.
This is important for investors, because it shows sustained underlying earnings growth, which drives share prices higher. The entire banking industry has been in recovery mode, as evidenced by a 26% increase in the
KBW Bank Index
this year, followed by a 30% increase during 2012. But sustained earnings strength and growth in tangible book value bodes well for long-term investors, even after the industry has returned to more normal valuations.
"At this point in the cycle, we do not view tangible book value (TBV) as a meaningful measure of valuation. After all, if a bank stock is still trading at a low price-to-tangible book multiple 5 years after the financial crisis, then chances are the low valuation is more indicative of sub-par earnings power rather than a mispriced valuation," KBW analyst Christopher Mutascio wrote in a client note on Tuesday. "However, we still find value in measuring TBV per share growth, as it can demonstrate which banks are generating shareholder value over time, regardless of the short-term moves in stock prices," he wrote.
According to KBW's data, these five large-cap banks have shown the most rapid growth in tangible book value per share for the three-year period ended Sept. 30.
- U.S. Bancorp (USB - Get Report) of Minneapolis saw its tangible book value increased 50.7% to $13.40 a share as of Sept. 30 from $9.49 in September 2010, for a compound annual growth rate (CAGR) of 16.0%.
- Wells Fargo's (WFC - Get Report) tangible book value increased 50.6% over the same period, to $23.23 as of Sept. 30, for a CAGR of 16.9%.
- Fifth Third Bancorp (FITB - Get Report) of Cincinnati saw its tangible book value grow 34.4% for the three-year period to $13.09 as of Sept 30, for CAGR of 11.5%.
- Huntington Bancshares (HBAN - Get Report) of Columbus, Ohio, saw 34.1% growth in tangible book value over three years to $6.10 as of Sept 30, with a CAGR of 11.4%.
- JPMorgan Chase (JPM - Get Report) placed fifth, with tangible book value per share growing 33.8% for the three-year period to $39.51 as of Sept. 30, for a CAGR of 11.3%.
Skeptical investors may point out that most of the big banks have seen a significant boost to earnings from the release of loan loss reserves during the past few years of recovery. Then again, releasing reserves as credit improves is a normal part of the credit cycle. And the skeptics certainly didn't give any "credit" to the banks as they over-reserved several years back. That was also a normal part of the credit cycle.
But KBW provided another set of numbers breaking out the reserve releases. The list of the top five banks by growth in tangible book value changed, with JPMorgan falling to sixth place, with adjusted tangible book value growing 18.3% for the three-year-period to $34.95 a share as of Sept. 30. KBW took out $4.56 a share, representing JPMorgan Chase's boost to earnings from reserve releases over the three-year period. After the adjustments, only two of the large-cap banks show double digit CAGR of tangible book value.