2020: Bank Performance Reality Check

As Capital Performance Group works on the 2019 Top Performing Banks analysis with our partners at American Banker, we're thinking about how dramatically the drivers of performance may change in today's economic environment. A few considerations:

• With yields on earning assets in virtual free fall, top performance in 2020 will be determined largely by a bank’s cost of funding. High-yield savings accounts and other methods for quickly growing deposit liabilities to fund asset growth no longer make economic sense for most traditional banks. There is no doubt, DDA funding matters more than ever.
• Credit quality is going to deteriorate, so some previously top-performing banks that enjoyed higher margins from higher-yielding, higher-risk loan businesses such as credit cards and leasing will likely see their level of nonperforming loans and leases spike compared to banks that were more conservative in their lending businesses. Being asset-sensitive made sense when rates were rising, but now the most asset-sensitive banks are being hit hard.
• Over the past few years, top performers where characterized by both higher revenue growth and higher growth in operating expenses. But revenue growth is facing gale-force winds, so the top-performing pendulum may swing toward those banks that focus primarily on controlling operating expenses.
• Lastly, holding higher capital levels relative to peers penalized banks when performance was measured on an ROE basis. However, capital is king in times of economic distress, so perhaps it’s time to elevate ROA, at least for a time, as a better metric to gauge performance.

In short, 2020 is shaping up to be a topsy-turvy year regarding the factors contributing to top performance in the banking industry. Achieving "top quartile performance" may be on the back burner in terms of strategic priorities for many bank management teams this year as they focus on the crisis at hand.