New York | The Institutional Risk Analyst is pleased to announce the publication of The IRA Top Ten US Banks, a quarterly look at the ten largest commercial banks in the U.S. Copies of the The IRA Top Ten US Banks report are available for sale via our online store.

In this inaugural issue of The IRA Top Ten US Banks, we profile the financial performance of the ten largest depositories in the U.S., all part of the 119 banks above $10 billion in total assets that are included in Peer Group 1 defined by the Federal Financial Institutions Examination Council (FFIEC). Below are the banks that are included in the report:

Source: Board of Governors/FFIEC

You will notice that we have excluded Bank of NY Mellon (BK) and State Street Corp (STT) from the list. This is because these institutions are more in the business of custody and data processing than credit.

You also do not see Goldman Sachs (GS) or Morgan Stanley among the top ten, this even though the consolidated assets of the parent companies put them into the top of Peer Group 1. The total bank assets of GS and MS are still less than 20% of the total assets of the parent holding company, a reflection of business models that are still predominantly focused on securities dealing (and related bad acts) rather than banking.

Below are some basic metrics that illustrate the different business models of the top ten banks. Notice that the largest banks have far less than half of their total assets in loans, again reflecting the diversity of business models that includes securities dealing and wealth management.

Source: Board of Governors/FFIEC

The first thing to notice about this list is the ways in which the largest US banks diverge in terms of business models. The highest return on assets (ROA) among the group is Capital One Financial (COF), a below prime credit card issuer and consumer lender.

Next in terms of ROA is U.S. Bancorp (USB), our long-term favorite among the top five money centers because of the strong earnings, solid funding and business stability. Notice in particular that the USB’s cost of funds at just 0.32% is one third of the peer group average of 1.42%. This is a reflection of the large escrow and other non-interest bearing balances that are the core of USB’s consistent profitability.

Another important observation is that JPMorgan (JPM) and Citigroup (C) have less than 40% of total assets in loans, again a reflection of how the universal bank business model differs from more traditional domestic commercial banks.

Even Wells Fargo (WFC) and Bank of America (BAC), which are largely domestic, have barely half of total parent company assets deployed in loans. But as we proceed down the list, from USB on in terms of total assets, the proportion of loans to total bank assets is well more than half.

Among the top banks, the highest net default rate comes from COF due to the credit card and consumer loan books, followed by Citi, JPM and USB. Notice that USB has more than 80bp better return on its loan book than JPM. And none of these loan spreads are particularly impressive when you remember that the machinations of the Federal Open Market Committee have resulted in the systemic underpricing of risk over the past decade. Just as we think that the twin idiocies of QE2-3 and Operation Twist have understated the 10-Year Treasury by a point in yield, we suspect that commercial and consumer loan yields are off by a like spread vs the Treasury benchmarks.

Another observation that needs to be made is the enormous difference in the number of physical branches among the top four banks. Notice that Citi had just 704 domestic branches, but almost 175 offshore. More than two thirds of Citi’s total deposits are offshore and uninsured. While Citi has the second lowest cost of funds among the top ten banks after USB, it is for very different reasons. Citi has a huge float from its global payments business and also manages its institutional funding base astutely, but the results in terms of ROA are still disappointing. Even with a gross yield on its loan book almost 200bp above its peers, Citi’s overall results measured by asset and equity returns are still mediocre.

Finally, by subtracting net loan losses and funding costs from gross loan spreads, we generate a nominal return for the lending book for the top ten banks. While these metrics differ from the official stats published (or not) from these respective issuers, they do allow for a comparison of the cash returns on credit extensions from the different banks.

Suffice to say that while COF and C may top the list in terms of nominal returns, were we to risk-adjust these figures both of these banks would quickly fall to the bottom of the list. And more importantly, in terms of growth, the biggest share of value creation is toward the bottom of the list among the smaller institutions. Indeed, since 2015 the number of banks above $10 billion in total assets has grown from 93 to 119 today.

Copies of the The IRA Top Ten US Banks report are available for sale via our online store.