The 5 Least Efficient Regional Banks


Since the financial crisis, many bank analysts and commentators, myself included, have focused on the sector's progress at working through the seemingly endless pile of toxic mortgages cluttering its collective balance sheet since the housing bubble burst.

While this continues to be a problem, as almost 700 banks remain on the FDIC's problem bank list, it now appears that this singular focus on soured mortgage portfolios should be replaced by a more well-rounded analysis of both profit and loss.

I say this for two reasons. First, data released earlier this week showed that third-quarter earnings in the banking industry were at a six-year high. And second, though perhaps more significantly, the year-over-year growth in profitability was fueled by an increase in net operating revenue as opposed to a decrease in loan loss provisions for the first time since the crisis.

What follows, in turn, is a list of the five least efficient regional banks as measured by the efficiency ratio, which is calculated by dividing noninterest expense by net operating revenue excluding loan loss provisions. As I discussed yesterday with respect to Citigroup, this figure tells us how much it costs a bank to produce every dollar of revenue.


Efficiency Ratio (TTM)

Zions Bancorp


Suntrust Banks


PNC Financial




People's United


Industry average


Sources: S&P's Capital IQ and the FDIC's Statistics on Depository Institutions.

As you can see, Utah-based Zions and Georgia-headquartered Suntrust take the unceremonious cake in terms of inefficiency, spending an average $0.72 in expenses to generate every dollar in revenue. Rounding out the top five are PNC, Keycorp, and People's United, all of which have efficiency ratios well in excess of the industry average.

To provide some more context, here's a chart of these banks relative to the industry since the beginning of 2009. As you can see, while PNC used to be the one standout, generally outperforming the industry until the end of 2011, it has since taken a turn for the worse.

Sources: S&P's Capital IQ and the FDIC's Statistics on Depository Institutions.

The Foolish bottom line
While bank investors should never rely on just one statistic to make an investment decision, factors like the efficiency ratio should always factor into the analysis. To learn about one bank that leads the industry in terms of efficiency, click here to download our free report: The Only Big Bank Built to Last.

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John Maxfield has no positions in the stocks mentioned above. The Motley Fool owns shares of KeyCorp and PNC Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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