Bank analysts offer their perspectives

CNY Business Journal (1996+), Nov 25, 1996 by Maliszwski, Paul

Few aspects of a business are more open to interpretation (and less understood) than the quarterly report. Commercial banks are no exception. Still, with the recent release of quarterly reports industry-wide, and in light of the major consolidations and acquisitions among banks in Central New York, it has become all the more worthwhile to ask banking analysts and bank presidents: What does the quarterly report reveal?

Financial-analysis firms such as Bauer (the firm that compiled the figures presented in this issue) try in their reports to offer some indication of a bank's fiscal health. An example is Bauer's star rating, essentially a rather conservative indicator based on capital held compared to the capital required by federal law. The star rating also considers factors such as proposed regulations, profitability, historical trends, loan delinquencies, repossessed assets, reserves, regulatory compliance, and asset quality.

Some analysts feel that Bauer puts too much emphasis on capital strength. Charlie Crowley, managing director of McDonald & Company Securities, an investment firm in Cleveland, Ohio, argues that evaluating banks on the basis of capital strength, while still a legitimate concern, should not be as much of a concern for the potential investor and might even be potentially misleading.

"It's an outdated way of viewing the industry," asserts Crowley." In the mid- to late-'80s, every investor was concerned with capital strength. They wanted to avoid thrifts that were undercapitalized, mainly in the interests of safety and soundness." Crowley suggests that safety and soundness need not be as great a priority for investors researching banks, if only because, with most major consolidations and acquisitions completed, the banking industry is already more stable. "To look exclusively for capital strength," says Crowley, "is to ignore that too much capital strength might indicate a bank isn't adequately reinvesting that capital."

Crowley looks closely at other parts of the quarterly report when he evaluates the health of a bank. He argues that the reinvestment of a bank's capital is a much better indicator for investors. Says Crowley, "A bank should get enough asset growth, an adequate and appropriate return on assets, as well as above-average returns on equity and per-share growth."

Peter McShane, director of financial services at Dragon Benware & Company, C.P.A.s in Syracuse, agrees with a perspective like Crowley's. He emphasizes the importance of a bank's ability to generate a return on assets and a return on equity. He also has some useful guidelines for investors who are looking into bank investments.

First, it's important to consider a bank within its peer group. In other words, a bank with assets of $1 billion should be compared with other banks nationally that have the same level of assets, not with the largest international banks.

Second, dollar values are not as revealing as ratios. While total assets or the value of delinquent loans cannot be ignored as indicators, it's better to put these values into some useful context. McShane suggests that an investor would do well to look at the ratio of investable assets to total assets. investable assets include loans, both commercial and home-mortgage, and other investment instruments. The level of delinquent loans should also be put into some context. How else can one understand delinquent-loan values of well over $100 million? The amount seems exorbitant on the face of things, but what does it mean to the bank in question? McShane suggests that the answer lies in looking at the ratio of performing to nonperforming loans.

John Zawadzki, regional president for Central New York at Fleet Bank, offers a final perspective. As the president of one of the institutions covered in the Bauer reports included in this issue, Zawadzki's emphasis is less a focus on quarter-by-quarter performance than talk of what the future looks like for Fleet. He mentions new products for the Syracuse market, including cash management on the Internet. He explains, "Fleet is looking at ways for consumers to do more of their banking from home, from their personal computers." Through imaging capabilities, a consumer can access the bank, examine canceled checks, and receive and customize account statements.

All of these new products are part of what Zawadzki calls Fleet's commitment to "strengthening the bank's current relationships." According to Zawadzki, one of the most important aspects of understanding a bank doesn't even appear on the quarterly report: Where are the decisions made? Zawadzki states that at Fleet many important decisions about local products, or even local acquisitions, are made right here, locally. "I can't say, of course, that Fleet won't acquire any more banks in the future," says Zawadzki, "but right now we're focusing our attention on deepening the relationships with our customers who are here."