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The worst large bank in America? (a constructive 3 minute exercise)

Many years ago I attended a dinner with a group of bank investors, including a good friend later profiled in the movie The Big Short. The topic of Fifth Third came up. Fifth Third had recently sold its payments business to scrounge up capital and my friend blurted out “FIFTH THIRD – WORST BANK EVER! WORST BANK EVER!!”

Brainstorming incompetence Fifth Third has gotten on its feet and it’s time for an update. News of a $130 million fine to Deutsche Bank on Friday brought up a thought that culminated in the twitter survey below – what’s the worst large bank in America? The survey focused on a few of the usual suspects:

It’s a dirty job exposing incompetence, but someone has to do it This exercise is not for spite and there are excellent people working at all of the contenders for this dubious honor. Usually, these banks are just the culmination of many strategy errors compounded. Given the sellside and media both profit from the businesses they cover, however, it’s up to bloggers and investors to dig into the underbelly of value destruction. If we do a good job, maybe we will rotate capital away from unfulfilled careers, sad shareholders, and generally wasted opportunity. The world can become a better place. With that said…

The contestants:

Regions (RF): a warm up – The survey respondents above got it right – Regions is not the worst. Yes, the company habitually mistreats depositors with innovative nickel and dime fees, and has a history of bad mergers and recession blowups. If you bought shares in 1996 at $17.75… you would still be able to buy shares at $17.75 today. With that said, Regions’ financial metrics are nothing to be ashamed of, with a 54% efficiency ratio, 38% of revenues from fees, margin over 3% and 18% ROTCE in the third quarter.

RF shares have underperformed bitcoin, S&P 500 since 1995

Wells Fargo (WF): getting closer – Cheating customers, scaling back the wrong business lines, competing on price, keeping two corporate cultures and missing spread revenue guidance like night follows day – this is Wells Fargo. Still, this is not the worst. 2.1% margin, 80% efficient (the non-recurrings are recurring), 5% ROE in 3Q can still be undercut. Moreover, Wells is deeply ashamed of its position and is taking steps to mitigate.

HSBC North America (parent HBC): serious contender

(source: MSN)

You would try to exit too if you checked these boxes:

  1. Lost money 4 of the last 5 years.
  2. Structurally unprofitable – 1.9% expenses / assets and margin under 1% make losses the rule rather than the exception.
  3. The bank carries $70bn in cash and $70bn in money market deposits. HSBC does this by keeping branches but competing on price for retail and private banking deposits. At least they recognize that this does not make sense.

HSBC is $260 billion in assets but is still lighting money on fire – the size of this fire makes burning man look modest! Still, management is taking steps to extinguish the flames. Who else can compete?…

Mistubishi UFJ

Mitsubishi is looking to be all things to all clients:

Not yet determined to focus resources, management has created a small-scale Bank of America, with trailing market share and notable inefficiency. Why? First, the bank’s 2.2% margin, while low for the US, looks fantastic by Japanese standards, where under 1% is standard. However, the bank cannot seem to avoid overspending, as show below.

For combining a 75% efficiency, 2% margin, and breakeven profitability on an ongoing basis, Mitsubishi, lacking the self-awareness of HSBC, has given us a Jets vs Jaguars competition. But do they win the lottery pick? We will leave things suspended where they are. After all, we’ve hit the 3 minute mark on this blog and we haven’t touched Deutsche. Also, there’s no point in raising the dander of PR executives in an organization that thinks nothing of spending millions on low return projects!

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