The Anatomy Of A Great Bank Share

Mention American banks like Citigroup, JP Morgan Chase, or Bank of America here in Singapore and you might get a knowing nod from some folks.

Mention an American bank like M&T Bank on the other hand, and a blank stare is all you might get.

But what you may not know is that M&T Bank has been the best performing bank share in the USA since 1983. Just check out the table below, which has the names of the other four banks making up the top five.

Bank Price on 31 March   1983 Price on 30 June   2013 CAGR
M&T Bank   Corporation US$1.34 US$111.75 15.8%
State Street   Corporation US$1.06 US$65.21 14.6%
U.S. Bancorp US$0.92 US$36.15 12.9%
Northern Trust   Corporation US$1.51 US$57.90 12.8%
Wells Fargo &   Company US$1.18 US$41.27 12.5%

Source: M&T Bank’s presentation for the Barclays Global Financial Services Conference

Here in Singapore, banks are a very important part of our capital markets. Our three local banks, namely DBS Group Holdings (SGX: D05), Oversea-Chinese Banking Corporation (SGX: O39), and United Overseas Bank (SGX: U11), together account for almost one-third of the Straits Times Index’s (SGX: ^STI) movement.

Given banks’ importance here, it might perhaps be worthwhile to dig into those five American banks to see what we can learn.

M&T’s great share price performance was brought to my attention by John Maxfield, my Foolish colleague over in the USA. These are his takeaways regarding the American banks:

First, the commercial banks on the list (M&T, US Bancorp, and Wells Fargo) are all boring banks — that is, ones that have largely confined themselves to the activities of traditional banking: collecting deposits and making loans. By comparison, none has a robust investment bank comparable with a JPMorgan Chase or Bank of America.

Second, the two non-commercial banks (State Street and Northern Trust) have almost entirely avoided credit risk by specializing in peripheral financial services — namely, asset management and custodial services.

And finally, as I’ve written recently, all of them avoided the same siren song of subprime mortgages that cast many of their competitors against the proverbial shoreline. This has allowed these banks — and the commercial lenders in particular — to both avoid losses and exploit the misfortune of less conservative lenders on the business end of asset bubbles.”

Looking at the lessons that Maxfield has drawn, I can see some parallels with our local banks.

For starters, making loans are an integral part of our local banks’ business model. At the end of 2012, the proportion of loans in DBS, UOB, and OCBC’s asset base stood at 59.3%, 60.5% and 48.1% respectively. With loans making up at least half of their assets, the banks are indeed heavily dependent on the “boring” business of collecting deposits and making loans.

In addition, the local banks all employed relatively low levels of leverage during the build-up to the 2007-2009 Great Financial Crisis. While low leverage does not avoid credit risks completely, the conservatism of the banks allowed them to reduce the amount of risks they faced.

Lastly, the three local banks’ had managed to side-step the 2007-2009 Great Financial Crisis admirably, taking relatively mild dings to their profits. That’s a testament of their ability to not fall for the lure of easy money found in the subprime mortgages that eventually sunk many Western banks.

Foolish Bottom Line

It seems that DBS, OCBC and UOB share a similar anatomy to some of the great bank shares in the USA. While that’s no guarantee of future market-beating performances for their shares, we can at least sleep better at night knowing that our financial institutions are running a tight ship at the very least.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.