We saw in the last screen that bank stocks with low (cheap) price-to-book ratios don’t necessarily outperform other banks and so now we push on in a different direction. Another way to test bank operations is to look at return on capital and, in bankspeak, return on equity (or ROEs). ROE is net income/equity so it tests earnings relative to equity capital and measures a few things simultaneously: How earnings are going and, the tricky part, capital efficiency. So here we go, for our next screen we test a portfolio of banks with the top quartile ROEs and see how this group performs.
Well, after seeing the improved results I can say we are moving in the right direction. The top quartile ROE portfolio outperformed the bank index in most years and over the 2009 to 2018 study period. Investors appreciate good ROEs it seems and we’ve solved another puzzle piece. Annual returns were still anemically low at just over 7% per year and this I’ll attempt to improve.
S.19– Banks: Top Quartile ROEs
|Stock Universe||Russell 3000 Index Banks|
|Screen Criteria||Top Quartile ROEs|
Test Results and Chart