Tuesday, May 22, 2007

Banking Institutions Valued By Net Tangible Assets

Banking Institions mainly derive their revenues and income from three sources: 1. net interest spread between assets and liabilities, 2. fees, and 3. Trading. Large Banking Institutions nowadays have several operating divisions accross several financial service areas but this general rule income derived from net interest spread, fees and trading generally holds. Bank of America, for example, reports its results in three divisions: 1. Consumer and Small Business Banking, 2. Corporate and Investment Banking, and 3. Wealth and Investment Management. BofA derives the largest percentage of its income from Net Interest Margin and Fees, and only in Investment Banking does the third catagory "trading" comprise a relatively large percentage of income (besides fees and net interest margin) -- trading as defined as gains on trading and holding of equities, bonds, options and other investments in its trading division.

Note further that a Bank is generally not a hedge fund so trading is presumably -- although perhaps not always -- a large percentage of income (but note that trading is a very large source of income for many if not most investment banks). Also note that the Wealth and Investment Management mainly accrues income from annual fees on assets under management, typically around 0.5% to 1.5% of total assets.

It follows from that the total amount of tangible assets on the bank's balance sheet -- generally to a banking institution, mainly investments and loans -- is a key source from which revenue and income is derived. It follows, with cavaets and exceptions (explored in detail below), that the size of a banking institution can be approximated by the value of the tangible assets on its balance sheet.

Which Banking Institution Boasts the Largest Tangible Asset Base?

From the above discussion, it is interesting to compare the largest publicly held banking institutions worldwide in terms of assets, as the size of the asset base has a large effect on profitability. A comparison of the largest publicly held banks worldwide at 5/07 shows some surprises in terms of which Banks are the largest (to a US based analyst), as shown below:

Largest Banking Institutions Listed By Tangible Assets:

Ticker; Company Name; PE (TTM/Proj); Tangible Assets; Price/Book Value; Price/Tangible Assets; Market Capitalization
DB; Deutsche Bank; 9.2/10.0; $2.20Tr; 1.60x; 3.4%; $74.9Bn;
BCS; Barclays; 10.4/9.7; $1.8Tr; 2.36x; 5.2%; $94.4Bn
ING; ING; 9.6/9.3; $1.58Tr; 1.76x; 6.2%; $96.8Bn
AZ; Allianz; 9.6/9.0; $1.46Tr; 1.34x; 6.5%; $94.5Bn
UBS; UBS; 13.5/10.7; $1.90Tr; 2.92x; 6.5%; $125Bn
CS; Credit Suisse; 9.2/10.5; $1.03Tr; 2.09x; 7.3%; $74.9Bn
ABN; ABN AMRO; 14.4/14.7; $1.18Tr; 2.65x; 7.5%; $88.7Bn
HBC; HSBC; 13.0/10.7; $1.68Tr; 1.99x; 12.8%; $215.8Bn
JPM; JP Morgan; 11.7/11.1; $1.30Tr; 1.53x; 13.8%; $179Bn
RY; Royal Bank of Canada; 15.9/na; $496Bn; 3.52x; 14.2%; $70.3Bn
C; Citigroup; 13.1/10.9; $1.84Tr; 2.24x; 14.7%; $271.1Bn
BAC; Bank of America; 10.9/9.7; $1.39Tr; 1.72x; 16.3%; $227.5Bn
WBK; Westpac (Australia); 15.5/13.6; $222.5Bn; 3.35x; 18.7%; $41.7Bn
WFC; Wells Fargo; 14.3/12.1; $482Bn; 2.63x; 25.1%; $121Bn

Notes on the above chart: in $US, at exchange rates as of 5/07, listed in ascending order of market capitalization/asset base, source: company SEC filings, and yahoo finance.

Surprising: Deutsche Bank Holds the Largest Asset Base:

Deutsche Bank at 3/07 posted assets of $2.20Trillion, significantly larger than Citigroup, which held assets of $1.84 Trillon at 12.06 -- that is, at an exchange rate of 1.35 Euro/Dollar, Deutsche Bank holds almost 20% more tangible asset than Citigroup. Deutsche Bank also holds 58% more assets than Bank of America. However, Deutsche Bank's profitability is significantly lower than Bank of America and Citigroup, and the market capitalization of Deutsche Bank is only $US74.9Bn compared to $227.5Bn for Bank of America and $271.1Bn for Citigroup. Why is the profitability of Deutsche Bank so much lower than Citigroup and Bank of America when DB posts a significantly higher asset base?

Deutsche Bank and Bank of America Operating Results Analysis:

It is clear that Bank of America and Citigroup are returning a much higher rate on their asset base than Deutsche Bank. In order to answer the conundrum of Deutsche Bank's relative low performance, a comparision by operating division is utilized here.

Bank of America 2006 Operating Performance by Division (Source: 2006 10-K)(note: Bank of America reports in three operating divisions)

I. Global Consumer and Small Business Banking: Assets: $382.4Bn; Return on Assets(06): 2.92%
2006 2005 2006 2005
Revenue: $41.7Bn $28.4Bn Net Income: $11.2Bn $7.0Bn

II. Global Corporate and Investment Banking: Assets: $689.3Bn, Return on Assets(06): 0.99%
2006 2005 2006 2005
Revenue: $22.7Bn $20.6Bn Net Income: $6.8Bn $6.4Bn

III. Global Wealth and Investment Management: Assets: $137.7Bn; Return on Assets(06): 1.74%
2006 2005 2006 2005
Revenue: $8.0Bn $7.3Bn Net Income: $2.4Bn $2.3Bn

2006 2005 2006 2005
Total Rev:$72.4Bn $56.3Bn Total Net Inc: $20.4Bn $15.7Bn

Deusche Bank 2006 Operating Performance (source: 2006 20-F, Euro/US$ exchange rate of 1.35)
(note: DB reports in two main divisions)

I. Corporate and Investment Banking Division: Assets: $1.37Bn; Return on Assets(06): 0.58%
2006 2005 2006 2005
Revenue: $25.2Bn $21.5Bn Net Income: $7.94Bn $6.42Bn

II. Private Clients and Asset Management Division: Assets: $166.9Bn; Return on Assets(06)1.56%
2006 2005 2006 2005
Revenue: $12.4Bn $11.5Bn Net Income: $2.6Bn $2.35Bn

2006 2005 2006 2005
Total Rev:$37.6Bn $33.0Bn Total Net Inc: $10.5Bn $8.77Bn

Discussion of DB and BAC 2006 Operating Performance:

The two most striking differences in operating performance between Deutsche Bank and Bank of America is 1) the low return on Assets in DB's Corporate and Investment Banking Division compared to the counterpart at BAC -- DB accrues only approximately half of BAC's return on assets, and 2) DB does not boast a strong retail banking and credit card network, but BAC does -- and BAC receives a return on assets of an incredible 2.73% on its retail and credit card banking division.

Credit Cards Have Largely Driven Bank of America's Improved 2006 Performance:

BAC's credit card division, according to the Company's 2006 10-K, returned an unbelievable 3.94% on assets in 2006. BAC's credit card division profits -- reported within BAC's Consumer and Small Business Division -- were $5.64Bn in 2006 (28% of total BAC company net income) on credit card assets of $143.2Bn. BAC credit card net income was up 442% from 2005. BAC explains that some of this growth was due to the merger with MBNA and some was due to organic growth, but does not elaborate further in its 10-K. However, it can be inferred with resonably certainty that pricing and/or organic growth was strong for BAC in 2006 as in 2005 the credit card division returned 1.57% on assets, growing to the abovementioned 3.94% in 2006.

Deutsche Bank contrasts with BAC, in that DB does not focus on credit cards, due in part to its historical lack of focus on consumer banking. DB was originally created over 80 years ago to finance trade between large German and International corporations -- and has never focused on consumer retail banking. Therefore credit cards are not a large source of income for DB and not likely to become one in the near future, as DB does not mention credit cards in its investment presentations and only mentions "credit cards" in passing reference 10 times in its 2006 annual report with the SEC.

Reasons for Low Return on Assets for Deutsche Bank's Corporate and Investment Banking Division:

DB funds its corporate banking activities mainly from both money markets and customer deposits, while Bank of America funds its corporate banking activities mainly from low interest cost deposits. As mentioned above, DB lacks the retail presence of Bank of America. This is significant as Bank of America has a significant source of low cost funding from retail banking accounts, on which they pay a low interest rate.

Bank of America maintained approximately $700Bn of deposits worldwide, representing nearly 100% of assets in its corporate and investment bank, while DB maintained $US550M of deposits worldwide, approximately 42% of assets in DB's corporate and investment bank. It remains the subject of another post if DB is generating an acceptable rate of return from its mix of deposits and money market funding, but it is clear that under similiar interest rate conditions it won' t match the returns on assets of Bank of America.

Note also, provisions for loan losses at Bank of America and DB are approximately equal and do not account for the differences in returns on assets.


As analysed in this post, the difference in how the assets are funded and in what activities makes a difference in the profitability of the firm. Still it is a useful analysis to determine how, more exactly, the banking institutions derive income. In the case of Bank of America and Deutsche Bank, the differences in profitability mainly stem from the sources of funding (deposits vs money markets) and credit cards. Deutsche Bank remains interesting as an investment due to its high amount of assets that represent earning power and its relatively low market capitalization currently (5/07). Bank of America's credit card division should be closely watched as it is a major determinant of future income.

No comments: