Inside the WGA Bank Top 10 Index

March 13, 2024 | Premium Service | So, how's your bank? This week we publish the 574th edition of The Institutional Risk Analyst (at least since 2017) from beautiful Tampa, FL. Tomorrow we speak at the annual event sponsored by Fay Financial, one of America's premier high-touch mortgage servicers and residential asset managers. But today we delve into our newest product, the WGA Top Bank Index, to better understand what makes the top ten banks so unique even as the whole industry is under mounting stress.

To orient the audience to just how good or bad the US banking sector is doing at present, consider the two charts below.  Things among banks as a population are not so bad based upon the measures of market performance and classical financial strength we use to triage the group. But the key issue that we wrote about in the most recent edition of The IRA Bank Book is the volatility we see emerging in credit loss metrics. We noted:

First we show the WGA Top 100 Banks separated into quartiles based upon market capitalization. The distribution is not so terrible as you might expect, but the bottom quartile is growing fast as the number of troubled and unprofitable banks has grown. Most recently the share of unprofitable institutions increased to 10.9 percent, FDIC reports for Q4 2023, the highest share of institutions since the 16.6 percent share reported in fourth quarter 2017.

Source: WGA LLC

Now, small banks historically outperform their larger peers, but size does matter. Just ask JPMorgan (JPM) CEO Jamie Dimon, who thinks that the Fed should wait a couple more months to cut short-term rates. That is another way of saying that he’d like to get rid of some competition.  JPM adds over $500 billion in market cap to the top quartile, but is the only one of the top five banks in the Top 25 Bank group. Now the chart below shows the top 100 banks arrayed individually by market cap. The top ranked banks start from the left and work across to the less astute on the far right.

Source: WGA LLC

The big bump on the far left of the chart is JPM, which was 7th in the WGA Top Bank 100 in Q1 2024. Wells Fargo (WFC) and Citigroup (C) are in the middle of the distribution by virtue of scores at 50th and 56th place, respectively. U.S. Bancorp (USB) and Bank of America (BAC) are at the bottom of the third quartile of the group at 70th and 72nd, respectively. We own USB and bought it cheap.

Note that the improved operating leverage at Citi helped CEO Jane Fraser vault over BAC CEO Brian Moynihan and almost pass a slowly improving Wells Fargo. After the dismal Q1 2024 earnings, we expect the bottom quartile of banks to grow in terms of market cap through 2024. So what makes the WGA Bank Top 10 unique? Below we provide some quantitative and qualitative comments on each bank and share the Q1 2024 WGA score results for each institution. 

WGA Bank Top 10 Index

Source: WGA LLC

Number One on the WGA Bank 100 in Q1 2024 was First BanCorp (FBP) with a total score of 18. Notice that none of the banks in the group had a perfect score. FBP has outperformed KBWB by 25% in the past year. The $2.7 billion market cap bank trades at 1.8x book value.

Next on the list is First Citizens BancShares, Inc. (FCNCA), which acquired many of the assets of Silicon Valley Bank last year. Located in Raleigh, NC, FCNCA is an acquisitive and well-managed institution which maintains a deal team ready to assess failed banks. FCNCA is up 75% in the past year and has outperformed the KBWB by 3x. The $22 billion market cap bank trades at a modest 1.1x book value at present.

Third among the WGA Bank Top Ten is International Bancshares Corporation (IBOC) in Laredo, TX. The $15 billion asset bank is a strong financial performer that has tracked the KBWB for the past year. The $3.4 billion market cap banking group trades at 1.3x book value, in part because they bucked the industry trend toward lower earnings and instead reported double-digit gains in EPS in 2023.

After IBOC comes Axos Financial (AX) at fourth on the WGA Bank Top Ten, a diversified financial services company with approximately $20.3 billion in assets and approximately $34.8 billion of assets under custody and/or administration at its broker-dealer unit. From a distance, AX may appear to be a consumer and corporate lender based Las Vegas, NV. But this is a national commercial banking organization, with no brick and mortar branches, that has been sophisticated and prudently managed.

AX has significantly outperformed the KBWB since the end of 2023, benefitting from hopes for a good economy in 2024. The bank is vulnerable to rising consumer loan defaults, but has the diversification of the advisor business. AX will be an interesting stock to watch in 2024. AX currently trades at 1.4x book on a 1.44 six-month beta,

Next after AX is perennial top performer American Express (AXP), the $160 billion market cap credit card issuer. AXP trades at 5.75x book value and is regularly one of the highest rated banking firms. What is the secret of AXP? High equity returns caused by equally high asset turnover and aggressive credit management. One area of weakness is operating leverage, where AXP is above 70% vs the mid-60s for Peer Group 1.

After AXP, next on the WGA Bank Top Ten is Discover Financial (DFS), the credit card issuer and payments platform that is being acquired by CapitalOne Financial (COF). DFS is an exemplary performer that suffers from its relatively small size. The $100 billion asset bank trades at 2.2x book value or less than half the multiple of AXP but twice the multiple of COF.

DFS has outperformed the KBWB consistently but, as we noted in an earlier note, really needs to join forces with a larger bank. Reports that DFS could not work out a deal with JPM suggest that management wanted a more equal partnership with COF. By taking out DFS, JPM was potentially denying COF growth and access to the DFS payments platform.

At 7th on the WGA Bank Top Ten is JPM, the only top five money center bank to make it into the WGA Bank Top 25 Index. JPM has significantly better market and financial performance than its large bank peers, including an efficiency ratio that is below the Peer Group 1 average in the low 60s. JPM trades at 1.7x book and has a market return that is likewise above its asset peers. JPM has out-performed the KBWB by 100% in the past year. It is the clear default bank for institutional equity managers.

At number eight on the WGA Bank Top Ten is Merchants Bancorp (MBIN), a $1.8 billion market cap institution that currently trades at 1.65x book value. Strong earnings growth in the face of negative industry headwinds is one reason why MBIN has prospered over the past year. The bank tracked the KBWB through much of last year when markets feared a recession, but in Q4 2023 the stock followed the other performers in the group higher. This stock may weaken if recession fears grow.

Next on the list after MBIN is OFG Bancorp (OFG) of Carmel, IN. OFG is the number nine stock in the WGA Bank Top Ten. MBIN has outperformed the KBWB by 3x in the past year, no surprise since the bank is consistently in the top decile of Peer Group 1 in terms of net income and low credit loss metrics. MBIN has double the capital of its peers and an efficiency ratio in the 30s. Eat your heart out Jamie Dimon.

Finally, number ten in the WGA Bank Top Ten is Synchrony Financial (SYF), the $17.6 billion market cap consumer bank that outperformed the KBWB by 100% over the past year. SYF trades at a 1.3x price to book and has superior asset and equity returns compared with its larger peers.

SYF has a bank charter, but behaves like a finance company. SYF has $120 billion in assets and an efficiency ratio in the 30s or half of the average expense ratio of Peer Group 1. Gotta love it, but SYF credit performance has deteriorated over the past year.

Provision for credit losses at SFY increased $603 million to $1.8 billion in Q4 2023, driven by higher net charge-offs. Net loss rates are in the mid-single digits and rising, putting SYF into the same category as COF and Citi. If we start talking about recession and consumer defaults, then SYF will be a name to watch and not in a good way as was the case in 2023.

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