The Secret to a Solid Bank Share


Has anyone here ever heard of Bank of the Ozarks? I have never heard of the bank until last week when I came across my American colleague Matt Koppenheffer’s article titled 1 Fascinating Secret of the Top-Performing Bank of the Decade.

Turns out, the tiny Bank of the Ozarks from the USA, with total assets of just US$4.71b and a market capitalisation of US$2.08b, had been one of the best performing bank stocks of the past decade with gains of more than 400% since the end of 2003.

The S&P 500, a broad American stock market index, had returned barely 65% in the same period and there was also the Great Financial Crisis of 2007-2009 in the interim, which devastated American banks aplenty. Put them all together, and Bank of the Ozarks’ performance becomes all the more remarkable.

Bank of the Ozarks’ Secret

How did the bank do it though? Matt shared a great insight in the article I referenced earlier: “Good banking is boring banking.”  He also provided an excerpt from Bank of the Ozarks’ 2012 shareholder letter written by chief executive George Gleason (emphasis Matt’s):

Our net income of $77 million reflects our commitment to three disciplines which have become hallmarks of our Company: superb net interest margin, favourable efficiency and excellent asset quality.”

And, it really is the three boring disciplines (superb net interest margin, favourable efficiency, and excellent asset quality) – not alchemical financial products or sexy risk-taking that – made Bank of the Ozarks such a solid bank share.

If we look at Bank of the Ozarks’ net interest margin, it’s an exemplar among banks. Here’s how it stacks up against US banks like Wells Fargo, as well as those of the local banking trio DBS Group Holdings (SGX: D05), Oversea-Chinese Banking Corporation (SGX: O39), and United Overseas Bank (SGX: U11); all four banks have been managed prudently and had survived the Great Financial Crisis admirably.

Net Interest Margin 2012 2011 2010 2009 2008
Bank of the Ozarks 5.9% 5.8% 5.2% 4.8% 4.0%
Wells Fargo 3.8% 3.9% 4.3% 4.3% 4.8%
DBS 1.7% 1.8% 1.8% 2.0% 2.0%
OCBC 1.8% 1.9% 2.0% 2.2% 2.3%
UOB 1.9% 1.9% 2.1% 2.4% 2.3%

Source: S& Capital IQ

While the other four banks have seen declining net interest margins, Bank of the Ozarks was the only bank with climbing margins and the metric is at a level that’s much higher than that of the other well-managed banks.

As for efficiency and asset quality (the former measures the percentage of revenue that goes to non-interest costs, while the latter’s measured through the non-performing loans/total loans ratio), here’s how Bank of the Ozarks fared against the other four banks

Efficiency* 2012 2011 2010 2009 2008
Bank of the Ozarks 46.6% 41.6% 42.9% 37.8% 42.3%
Wells Fargo 58.5% 61.0% 59.2% 55.3% 54.0%
DBS 44.8% 43.3% 41.4% 39.4% 43.3%
OCBC 40.6% 43.2% 42.3% 37.3% 43.7%
UOB 42.3% 43.0% 41.0% 38.4% 39.0%
*With the Efficiency ratio, the lower the better

Source: S&P Capital IQ

NPL/Total Loan Ratio* 2012 2011 2010 2009 2008
Bank of the Ozarks 0.3% 0.5% 0.6% 1.2% 0.8%
Wells Fargo 2.5% 2.7%% 3.4% 3.1% 0.8%
DBS 1.2% 1.3% 1.9% 2.9% 1.5%
OCBC 0.8% 0.9% 0.9% 1.7% 1.5%
UOB 1.5% 1.4% 1.9% 2.2% 2.0%
*With the NPL/Total Loan ratio, the lower the better

Source: S&P Capital IQ

For Bank of the Ozarks’ efficiency, we can see that it’s much higher than that of Wells Fargo, while remaining comparable with that of DBS, OCBC, and UOB.

Meanwhile, asset quality is where Bank of the Ozarks really takes the cake, as it “primarily made loans to borrowers in a position to pay them back”, according to Matt. That’s a discipline that’s very important especially in a situation, as it was during the Great Financial Crisis, where its peers were fighting a race to the bottom by offering loans indiscriminately in a bid to fuel growth.

Foolish Bottom Line

Those rows of figures presented in the tables above help give us an insight on what separates a great bank (Bank of the Ozarks) from a good bank (Wells Fargo). While local investors in Singapore might not be interested in Western banks, learning from great examples elsewhere can help bring things into perspective and help find potential investing opportunities in the three local banks, if any.

Singapore’s stock market is dominated by the banking industry, as evidenced by how the three banks together make up almost one third of the market-capitalisation-weighted Straits Times Index (SGX: ^STI), the stock market barometer here. For that reason alone, investors should perhaps spend some time thinking about what makes a bank stock great and Bank of the Ozarks can make for more than an appropriate case-study on that front.

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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.