This is a short post, comparing basic financial information of the too-big-to-fail banks (these are: Bank of New York Mellon, Bank of America, Citigroup, Goldman Sachs, JP Morgan, Morgan Stanley, State Street, and Wells Fargo). Of these organizations, three are not headquartered in New York (BOA in Charlotte; State Street in Boston; WFC in San Francisco/Minneapolis).
The information I have included is the change in stock price over the 2008 crisis and price performance since the trough up to now; return on assets; a liquidity ratio (from the balance sheet, cash as a ratio to total current liabilities); and, profit as a share of total revenue. All this information can be collected from the balance sheets and income statements of the banks, which I retrieved using Google. The figure below contains the information.
|Stock price change||ROA||Liquidity (Cash/Current liabilities)||Profit/Revenue|
|2007-2009||2009-2014||June2014||June2013||avg 2013||avg 2012||avg 2013|
There are a few points I see as especially relevant. First, almost none of the banks have restored the price of their stock to levels seen around 2007, the stock market peak. Not all of the banks, it should be said, were trading at historical peaks in 2007; nonetheless, they all responded to the crash in 2008. Bank of New York Mellon, State Street, JP Morgan, and Wells Fargo had below-average declines, but only JP Morgan and Wells had recovered their losses. The worst-performer has been Citigroup, which comes as no surprise seeing as it is easily the worst-run organization on the planet.
Second, the range in ROA is quite large. I’ve spent a lot of time looking at ROA at lots of other banks of various sizes and specialization; a previous post here put US total average bank profitability currently at around 1%. Wells is the only company reporting an ROA greater than the US average (in 2014; many more were closer to the average about a year ago). I’m not sure what the patterns are–perhaps there are regional trends, but I suspect they have much more to do with target deposit markets and product lines, etc–but this variability in ROA encourages further analysis.
Third, it is illuminating to see the liquidity ratio comparison if only because it introduces the challenge faced by regulators and supervisors on macro-prudential matters. Current liabilities consist of accounts payable, short-term/current long-term debt, and ‘other current liabilities.’ Each of the banks, in turn, have different concentrations in each of these areas. The amount of cash (and current liabilities) also differs substantially between companies. Obviously, one of the more quiet fights by regulators over the last few years has been to raise capital ratios (one way to ensure that costs of crisis resolution fall as much on the private sector as possible). Some of these businesses simply operate in riskier markets; this may explain why there is such variation in liquidity ratios. I wonder how this unevenness is looked at by the regulators themselves?
Finally, the profit as a share of revenues for all too-big-to-fail banks is close to 20 cents on the dollar. I’m not sure what this number is for all Fortune 500 companies, but I remember hearing an interview with the CEO of ExxonMobil some years ago where he said that Exxon’s profit per revenue was 10 cents on the dollar, and that this put Exxon ‘right in the middle’ of the Fortune 500. If you look at the most recent Fortune 500 list, the top four companies (oil majors and conglomerates) are all less than 10%, but then Apple is at 21.6%. What this all suggests to me is that financial conglomerates enjoy profit margins that are much higher than capital goods producers and energy companies, but then there remains quite a bit of difference. Again, I suspect this has to do with product and market specializations but also company structure.
It is easy to clump the too-big-to-fail firms together, but in fact they serve quite different markets. When we devise strategies and policies to control them, we need to take into account this heterogeneity and plan accordingly.