In my 31 years of covering banks of all shapes and sizes as a research analyst, I’ve noticed an interesting phenomenon: The rate of growth at banks matters more to investors than most bank executives and board members realize.
Private equity and venture capital funds closely monitor both the level and pace of revenue growth at banks. A simple way for banks to track their revenue progress on a quarterly and annual basis is to convert core spread income and fees into a combined per share figure each period, examine how this changes and compare it to growth rates with peer companies. The Janney research team executed such an exercise in late August 2022 for over 200 public banks that have at least three analyst earnings estimates, using reported GAAP financials through June 30.
Revenue Growth at Banks
Median growth rates in per share terms over the past 11 years, from 2010 to mid-2022, are 3.6% on total revenues and 4.1% on spread revenue, or net interest income, alone. Between year-end 2019 to mid-2022, the median increase of these 200 banks was 6.2% in total revenues and 5.7% on spread income alone.
At the same time, total assets increased a median of 11.1% since 2010, and 13.9% since 2019. Asset growth in recent history has been influenced by excess liquidity, which fueled a 40% deposit expansion for all banks with a charter from the Federal Deposit Insurance Corp., along with a corresponding expansion of cash, securities and loans for all financial institutions.
Finally, our analysis looked at the number of common shares outstanding for these public banks. Shares rose over 5% annually from 2010 to 2022, but zero from 2019 to 2022. This captures the pace of consolidation the past 11 years, but reflects that banks engaged in far more share repurchases during the pandemic when stock prices dropped to the discounted levels they remain at today.
A Tale of Two Banks
What is the best way for bank executives and directors to leverage this data and analysis? At Janney, we like ranking the entire bank data set, calculating percentiles and comparing peer banks with each other.
A great example are two $40 billion banks: Both were once small community banks two decades ago and successfully built strong organizations. Bank A engaged in a transformative merger in 2014; Bank B did a handful of small acquisitions but achieved 90% of its asset growth organically. Comparing these two mid-cap banks today, we see notable differences.
Since 2010, Bank A’s revenue per share growth has been in the 60th percentile of our analysis, or 115th out of 210 banks. Its spread income per share is similar. This includes the bank’s transformative merger eight years ago.
Bank B is in the top decile on revenues per share — 13th out of 210 public banks since 2010. It ranks 19th on spread income per share over the past 11 years as well. The bank’s largely organic expansion is a clear standout.
This scenario is very similar for both banks when we look to how the banks performed between 2016 to 2022. Bank A is still in the 60th percentile; Bank B is within the top 15% despite significant asset expansion.
Between year-end 2019 to 2022, Bank A enjoys significant improvement; revenue per share growth accelerates to place it in the 39% percentile, or 81st out of 210 peers. Its spread income per share is even better: Bank A is now in the top third of banks in the analysis. In comparison, Bank B’s revenue growth has moderated slightly: the bank is now in the 18th percentile on its revenue per share; it is also in the top third on spread income per share. Its size slowed its growth pace, although the bank’s performance remains superb overall.
We observe that Bank A was able to improve its relative growth in revenues per share over the last few years, while Bank B is still strong, even if growth per share is a touch slower than the past. In our view, this is normal for banks as assets rise.
This exercise underlines for us that financial institutions can change their destiny if executives and directors focus on top-line growth and shareholder returns. Investors — and banks — should care about measuring the growth rate of bank revenue, and executives and boards would be wise to track and discuss this performance metric with investors. Over time, this should lead to a better stock valuation as banks make progress on growing their revenues per share relative to peers.