Friday, 19 June 2009

Hallmarks of Success for Banks: Strong Revenues

Above-average revenue growth: Historically, many of the best performing bank investments have been those that have proven capable of above-average revenue growth.

Wide margins have generally been elusive in a commodity industry that competes on service quality.

  • But, some of the most successful banks have been able to cross-sell new services, which adds to fee income, or
  • pay a slightly lower rate on deposits and charge a slightly higher rate on loans.

Keep an eye on 3 major metrics:

  • 1. net interest margin
  • 2. fee income as a percent of total revenues, and
  • 3. fee income growth.

The net interest margin can vary widely depending on

  • economic factors,
  • the interest rate environment, and
  • the type of business the lender focuses on,

so it's best to compare the bank you're interested in to other similar institutions.

Fee income made up 42% of bank industry revenue in 2001 and has grown at an 11.6% compound annual rate over the past 2 decades.

A large and diversified company such as Fifth Third generates more than 40% of its net revenues from fee income, whereas smaller, less diversified companies such as thrifts (e.g. Golden West) get just 10% to 12% of income from fees.

Make sure, therefore, that you're comparing similar companies and that you understand the company's strategy. As always, examine the number over a period of time to get a sense of the trend.

Related posts:
Hallmarks of Success for Banks
Hallmarks of Success for Banks: Strong Capital Base
Hallmarks of Success for Banks: ROE and ROA
Hallmarks of Success for Banks: Efficiency Ratios
Hallmarks of Success for Banks: Net Interest Margins
Hallmarks of Success for Banks: Strong Revenues
Hallmarks of Success for Banks: Price-to-Book

No comments: