The banking industry in the US is one of the highly regulated and competitive industries. Thousands of banks operate in the country with some as small as one or branches. In addition, a few banks operate as online only banks. Of these banks, investors have quite a few options to invest in some of the publicly-listed banks. There are over 50 banks listed on the NYSE and the NASDAQ is home to over 325 banks.
With so many bank stocks listed, which ones are the best in terms of value creation for shareholders?
One way to identify such stocks is to perform due diligence on your own using various metrics and some subjective factors. Another option is to consider list of banks that were analyzed and ranked as the best banks for creating value by the Bank Director magazine. The magazine recently published its annual list of the Top Banks in various categories. The winners for creating value were based on many factors which are detailed in the below excerpt:
To identify the best bank for creating shareholder value, Bank Director examined and ranked each institution based on its ability to consistently generate a high level of profitability, through average return on assets and return on equity from December 2014 to December 2019, as well as the standard deviation of both metrics. We also looked at growth in ROE, ROA and pre-tax pre-provision (PTPP) income over the same time frame. And we factored in dividend growth and average trade volume to understand the liquidity of each bank’s stock. These factors were ranked to produce an overall score. The category rewards growth but places a greater emphasis on consistency.
Source: Best Bank for Creating Value, Bank Director
Abilene, Texas-based First Financial Bankshares (FFIN) is the winner among the 20 banks selected in this category. The bank has been consistently growing earnings for the past 34 years. From the article:
“It’s a different breed of bank than most players out there,” says Hovde Group analyst Brett Rabatin, citing First Financial’s culture, conservative lending strategy, fortress balance sheet and successful M&A track record. Another factor is its strategy to compete with a handful of banks in its small-town markets; the bank prefers to skirt around metropolitan areas. First Financial is also a true relationship lender, Rabatin adds. “A lot of banks like to say, ‘we’re relationship lenders,’ [but] this is one of the few banks where it shows up. It shows up in their loan yield, it shows up in the profitability.”
The Top 20 Banks for creating value are shown in the table below:
| Rank | Bank Name | Ticker | Score | ROA (Avg.) - YE 2014 YE 2019 | Avg. Trade Volume - SEPT. 2020 |
|---|---|---|---|---|---|
| 1 | First Financial Bankshares | FFIN | 7.92 | 1.79% | 511,782 |
| 2 | Southside Bancshares | SBSI | 8 | 1.17% | 123,885 |
| 3 | Glacier Bancorp | GBCI | 8.88 | 1.42% | 661,117 |
| 4 | Lakeland Financial Corp. | LKFN | 8.92 | 1.44% | 132,968 |
| 5 | Bank OZK | OZK | 9.25 | 2.05% | 970,818 |
| 6 | Meta Financial Group | CASH | 9.29 | 1.08% | 240,842 |
| 7 | Independent Bank Corp. | IBCP | 9.92 | 1.17% | 125,709 |
| 8 | Stock Yards Bancorp | SYBT | 10.08 | 1.54% | 88,751 |
| 9 | The First Bancorp | FNLC | 10.29 | 1.17% | 15,787 |
| 10 | Prosperity Bancshares | PB | 10.38 | 1.34% | 494,390 |
| 11 | Community Bank System | CBU | 10.46 | 1.37% | 263,598 |
| 12 | Auburn National Bancorp. | AUBN | 10.63 | 1.03% | 10,584 |
| 13 | City Holding Co. | CHCO | 10.83 | 1.53% | 74,314 |
| 13 | Southern Missouri Bancorp | SMBC | 10.83 | 0.96% | 14,695 |
| 15 | Greene County Bancorp | GCBC | 11.42 | 1.20% | 3,900 |
| 16 | Horizon Bancorp | HBNC | 11.63 | 1.05% | 152,587 |
| 17 | Eagle Bancorp Montana | EBMT | 11.71 | 0.87% | 30,150 |
| 18 | WSFS Financial Corp. | WSFS | 11.92 | 1.21% | 270,004 |
| 19 | Hingham Institution for Savings | HIFS | 13.13 | 1.33% | 3,581 |
| 20 | First Capital | FCAP | 14.04 | 1.07% | 7,810 |
A few observations:
- Consistent growth is the key factor shared among the above banks. One way this can be measured is reviewing their dividend payment history.
- For example, Montana-based Glacier Bank(GBCI) has paid dividends for 143 consecutive quarters and has increased dividend 46 times. In recent years, the company has also paid out a special dividend. The last special dividend was $0.15 per share paid out in January of this year.
- All the above banks have decent dividend yields with room to increase.
- Long-term returns of stocks are also excellent. For instance, a $10,000 investment in Prosperity Bancshares (PB) five years ago would have grown to over $17,200 as of June 25, 2021 according to S&P. The same amount in First Financial Bankshares, Inc(FFIN) would have grown to over $33,300.
- With the economy recovery projected to be strong this year, banks are bound to generate higher profits and these regional banks offer excellent choices for an investor looking to profit from the growth potential.
Disclosure: Long GBCI
