Research — Jan 17, 2025
Banking on Industry Data: Navigating the Ebbs and Flows of the Banking Sector
By Frank Zhao and Mengmeng Ao
Over the past two decades, the U.S. banking sector has experienced periods of both exuberance and turbulence, shaped by historic events such as the 2000s housing boom, the subsequent subprime crisis, the passage and eventual easing of Dodd-Frank, regional bank runs, and, more recently, expectations of a more favorable regulatory environment and pro-growth policies. This publication aims to help investors navigate the sector’s ebbs and flows by examining thirty-one stock selection strategies over a 22-year period, offering critical insights into banking characteristics that distinguish winners from losers.
Source: S&P Global Market Intelligence Quantitative Research & Solutions. Data as of Oct. 18, 2024.
Key findings for U.S. banks over the past 22 years, starting in June 2002, are:
- Valuation and Loan Quality Stock Selection Strategies Have Historically Excelled: U.S. banks trading at lower financial multiples or with higher-quality loan portfolios outperformed their counterparts by 9.6% per year, with an information ratio of 1.04.
- Deposit Cost & Funding Stability Drove Outperformance for Large U.S. Banks: Banks with lower deposit costs or more stable and diversified funding outperformed their counterparts by 8.7% per year, with an information ratio of 0.58.
- Valuation, Loan Quality, Return on Asset Base, and Deposit Cost All Drove Outperformance for Small U.S. Banks: Buying small banks based on these four financial dimensions outperformed their counterparts by 11.2% per year, with an information ratio of 0.96.
- Economic and Risk-Adjusted Performance During Bear Markets Outpaced That of Bull Markets: Valuation and Loan Quality long-short strategies excelled during bull markets, yielding 11.2% per year with an information ratio of 0.96, while defensive strategies in categories such as Return on Asset Base or Financial Strength excelled during bear markets, yielding 28.0% per year with an information ratio of 1.60.
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