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
( BKX) 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.
Here are the top five large-cap banks by growth in tangible book value, backing out reserve releases, according to KBW.
- U.S. Bancorp saw 47.4% growth in adjusted tangible book value over the three-year period to $13.99 a share as of Sept 30, backing out 31 cents a share in reserve releases. The adjusted CAGR was 15.8% -- still a very impressive figure.
- Wells Fargo achieved 44.1% growth in adjusted tangible book value to $22.23, backing out a dollar a share for reserve releases. WFC's adjusted CAGR was 14.7%.
- PNC Financial Services Group (PNC) - Get Report of Pittsburgh saw a 23.3% increase in adjusted tangible book value to $46.69 a share as of Sept. 30, backing out $1.98 a share for reserve releases, for a CAGR of 7.8%. PNC ranked sixth on the unadjusted list, with 28.5% growth in TBV to $48.67, for a CAGR of 9.5%.
- Huntington ranked fourth with adjusted TBV growing 22.9% over the three-year period to $5.59, backing out 51 cents a share for reserve releases, for a CAGR of 7.6%.
- Fifth Third ranked... fifth on the adjusted list, with TBV growing 22.6% over three years to $11.94 as of Sept. 30, backing out $1.15 a share for reserve releases, for a CAGR of 6.1%.
Among large-cap banks, U.S. Bancorp and Wells Fargo continue to stand out as steady, strong earners. Over the past 12 quarters, if we take the mean of U.S. Bancorp's returns on tangible common equity (ROTCE), we come up with a very impressive 24.2%, according to data supplied by
Thomson Reuters Bank Insight
. For Wells Fargo, the mean ROTCE for the same period was 17.5%, which is also a strong figure.
Premium valuations appear warranted for USB and Wells Fargo, but the shares are still relatively cheap, considering that each easily traded above 20 times forward earnings estimates before the credit crisis of 2008.
Shares of U.S. Bancorp closed at $37.83 Tuesday. The shares have returned 21% this year and trade for 11.8 times the consensus 2014 earnings estimate of $3.20 a share, among analysts polled by
Wells Fargo closed at $42.96 Tuesday. The stock has returned 28% this year and trades for 10.7 times the consensus 2014 EPS estimate of $4.01.
-- Written by Philip van Doorn in Jupiter, Fla.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.