Community/Regional Banks Continue to Outperform Big Banks in the Stock Market

Stock investors currently are valuing the community/ regional banking sector at a higher price-to-book value ratio than the largest U.S. banks, as recently highlighted in a WSJ article.  The valuation difference is particularly interesting in the context of several recent events:

  • the May 14, 2012 announcement by the Federal Reserve, FDIC and the OCC that  stress testing for banks with assets of more than $10 billion will likely be subject to a higher degree of scrutiny than smaller commercial banks

The JP Morgan disclosure adds to a growing sentiment that the nation’s largest banks operate very differently from smaller community banks and that Dodd-Frank and other regulations may be more effective when tailored between these two different market segments.

Community or regional banks are generally defined as having a local geographic scope, high amounts of loans and core deposits from their community, local directors and officers, a local corporate headquarters,  and other characteristics showing a strong connection to their local community.  Community banks often have less than $1 billion in assets, but also can include banks with up to $10 billion in assets if they exhibit the other characteristics of a community bank.

The business plan of a community bank primarily is focused on gathering deposits and making loans within the communities it serves.  The attached graphic provided by the Iowa Division of Banking compares the percentage of bank assets dedicated to loans by Iowa state chartered banks as compared to all U.S. commercial banks.

Community banks in Eastern Iowa have performed well during the past five years, as highlighted in a recent article in Business 380 Magazine. a notable point given the difficulties of the banking industry nationwide over the past five years.

What does this mean to our clients?  At least for now, stock investors appear to believe that community banks may more effectively manage their business through this economic recovery and the implementation of Dodd-Frank.  In the case of financial institutions, and particularly community banks, it also means a continued focus upon compliance costs.  For corporate clients, it is a reminder that not all banks are the same.  Some offer a wider array of products and services.  Others offer a greater focus upon relationship banking and customer service.

A final note: despite one of Dodd-Frank’s stated goals “to end ‘too big to fail’,” the largest U.S. banks slightly increased their market share of total deposits from June 2010 to June 2011.

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