Banks leading the midtier rankings this year cannot afford to get too comfortable. Chances are the top 20 could look a lot different next year.
Nobody knows yet how deeply the coronavirus pandemic will scar the nation's economy, but what's certain is the environment is changing for banks, including those with assets between $2 billion and $10 billion.
Credit quality is expected to deteriorate, loan growth is uncertain and fee income — which was a major contributor to profitability for the top performers in 2019 — could be in for a dramatic shift. Look for fees from wealth management and deposit service charges to be less of a factor, while lenders active in the government's loan program to help small businesses stay afloat through the crisis see their fee income surge.
"My guess is the top performers will be reshuffled in 2020 from the group we have today," said Claude Hanley, a partner at Capital Performance Group, which compiles our annual bank rankings.
Even so, Hanley said, there are some interesting trends in the data.
Consider this: The top 20 midsize banks were more profitable in 2019 than 2018, boasting a median return on average equity of 16.96%, an increase of 52 basis points from the prior year.
The median for all 231 institutions that fit the ranking criteria was 10.40%, a year-over-year decline of 16 basis points.
The top 20 managed to improve profitability despite the fact that their median net interest margin compressed by 15 basis points to 3.46%. Hanley blames a trio of interest rate cuts last year and a higher cost of funds for the shrinking margins.
(Click on “view table” at the end of this article to see the ranking for this year and click on the links below to go to midtier rankings from past years.)
See rankings from past years:
No participation trophies here: Our 2019 ranking of midtier banks The branch-closing conundrum: Our 2018 ranking of the midtiers Hey, big spenders, way to go: Our 2017 ranking of the midtiers
So what gave leading banks their edge? They controlled expense growth while still boosting assets by a median of $44 million, to $3.2 billion, according to Hanley.
The peer group grew at an even faster rate last year, bulking up their assets by a median of $366.9 million to $3.7 billion. But their 2.53% ratio of noninterest expenses to average assets was higher than the 2.17% of the top performers.
"One takeaway — size doesn't necessarily guarantee top performance," Hanley said. "Clearly the high performers were able to grow positive operating leverage by pushing more through without spending more on expenses."
But with the pandemic comes a lot of uncertainty about future performance, particularly on the loan front.
"I don't think we know how deep this recession will be in terms of problem loans," Hanley said. If unemployment keeps rising, "your pool of qualified borrowers shrinks significantly."
The metric that determines which banks rise to the top in 2020 could very well turn out to be the ratio of nonperforming assets to total assets, he said. (Hanley also shared more insight about
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