Charting Banking XII: the Texas ratio by bank size
There has been lots of talk of how weak are small banks and how are they going to stand the tsunami of CRE maturities that should have arrived several quarters ago. Well let’s see how small and big banks are performing by the standard of our new tool.
The first thing to notice is the heavy concentration in the Big 4 (JP Morgan, Bank of America, Citigroup, Wells Fargo) with 44% of the US total capital (tangible equity plus reserves) and that their Texas ratio is similar to the total average (34.8% vs 32.6%). Given their importance, we will specifically check their indicators later on
Very surprising is how well capitalized are the second tier large banks by these measure. Without going into the details, some possible explanations are:
- List includes Investment Banks: for the like of Goldman Sachs and Morgan Stanley the Texas ratio is less meaningful and very low
- Less exposure to investment banking: and the consequences of investing in exotic securities as some of the big four
- Regional scale advantages: above average profits to defend the capital impact with large provisions and reserves, compared with small banks
- Access to capital: Compared to smaller banks, they have the preference of investors at the moment of dilutive capital raise.
That last point is well stressing out. That some large banks are currently well capitalized does not prove that they were either good investments or that their underwriting and capital standards were above average. It may just mean that they diluted their way to health. Just look at Citigroup that now has a substantially improved 26.4% Texas ratio.
What about the medium and smaller banks? Well, midsized banks ($250M to 5000M in assets) are the most threatened. They represent a 14% of the US banking system total capital and their Texas ratio is close to 40%; nothing to be particularly concerned but still well above average. It may signal the need for more capital for these institutions.
Banks below $250 M in assets are reporting surprisingly good numbers, but their importance is negligible on a general level (less than 5% of the system total capital) . Also, from the point of view of an investor these institutions are risky given that just one bad loan can flip a bank.