While some smaller regional lenders are seeing increasing commercial loan demand, it would appear that most banks will continue to focus on making their operations leaner, in order to wring every last bit of expense savings. At this stage of the credit recovery, many banks continue to bear outsized expense levels as the work through problem loans and repossessed real estate. The unfortunate aspect of improvements in these areas is a wave of staff layoffs, which will continue until the banks feel the need to add production staff. A bank's efficiency ratio is, essentially, the number of pennies of expenses it incurs for each dollar of revenue. It's not surprising to see banks with the greatest credit overhang having the highest (worst) efficiency ratios; investors can expect plenty of discussion on efficiency ratios and cost cutting during first-quarter earnings calls.
According to data provided by Thomson Reuters Bank Insight, Bank of America ( BAC) had a 2012 efficiency ratio of 84.11% in 2012, improving slightly from 84.52 in 2011. This was the highest efficiency ratio among the 24 components of the KBW Bank Index ( I:BKX), which is hardly surprising, since Bank of America, through its ill-timed acquisition of Countrywide Financial in 2008, has, by far the greatest number of problem mortgage loans, repossessed properties, and repurchase demands from investors to deal with. Among major regional players, U.S. Bancorp ( USB) of Minneapolis had the best efficiency ratio of 52.07% in 2012, improving slightly from 52.40% in 2011. The company's excellent efficiency ratio is reflected in its very strong earnings performance, with a 2012 operating return on average assets (ROA) of 1.65% and return on average tangible common equity of 20.80%, according to Thomson Reuters Bank Insight.