We analyze our group of 27 banks across a number of performance and market-related metrics and use a proprietary scoring algorithm to assign ratings to individual banks within three industry segments -- Super Regional, Regional and Super Community. The definitions of these sectors and a listing of the banks we follow can be found here. The derived score is based on both absolute and relative performance and is used to rank each company relative to its industry sector and to inform our valuation estimates and projections. Every quarter and at the end of the year we name our top-rated banks in each sector and an overall champion. And now that third quarter results are in and analyzed, we can report the long-anticipated results.
Our Three Sector Winners
All of our top-rated companies have consistently made the list over the past couple of years. The only new addition this quarter is PNC (PNC), which came in as our runner up in the Super Regional category, edging out Regions which came in as a strong #3. The consistency achieved by these top-rated banks is a tribute to their management teams who have shown the ability to deliver top-tier results throughout a variety of economic cycles. We’ve also identified our lowest rated banks. However, because we choose to accentuate the positive, the ranking of all the banks we cover is only available to subscribers of our in-depth reports.
All of these top-rated banks have several factors in common – they run traditional business models, perform extremely well on the basics, and deliver consistent and sustained results through a variety of economic cycles. In our view, the key attribute that connects these companies is focus – they know what they do well and don’t get distracted or dissipate resources by chasing hobby businesses or unfamiliar markets. This is a testament to what we consider to be strong, experienced, and effective management teams in all of these banks. While performance on various metrics varies, each of these companies is ranked at or above average on every metric we analyze and leads their sector in a few key categories. It is also not surprising that they all rank in the top three on Net Interest Margin and first in Efficiency ratio. This shows that they manage their balance sheet mix and expense structures rigorously.
Highest Ranked Metrics
Does the Market Care?
In a perfect world and with an efficient market, we would expect our ratings and rankings to translate into higher market multiples and stronger market performance. And, often it does, but not always. We use our scoring algorithms and proprietary valuation model to set a target price for each of our companies’ stock. We don’t really expect to call the price with precision, but we use it to assess whether we believe the company is overvalued, undervalued or fully valued relative to the banking sector and market as a whole. Earlier in the year, we identified MTB, WAL, EWBC, and OZK as undervalued and PNC as fully valued. As the chart shows, each of these companies took different paths recently with WAL, EWBC, and MTB performing above benchmarks , PNC and WTFC now performing at benchmark, and OZK underperforming by a significant margin. We believe that Bank OZK has been unduly punished for their relatively large Commercial Real Estate portfolio which led to a double downgrade by Citibank. In fact, they are now trading at the lowest PE of any of the banks we cover. This, combined with our performance assessment and their historical market performance, led us to designate the bank as undervalued and, in a sense, on sale.
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