Bank Relative Growth Score (RGS)

A means to count what matters

What Grows Value?

In my journey to grow as an investor (and human) I’m constantly trying to figure out what the core or fundamental truths are of any topic. Some call me a philosopher at heart.

In my past life as a baseball player for example, the fundamental truths of being great hit me like a ton of bricks every once in a while. I’ll never forget being in FL and listening to “You dropped a bomb on me” being played over the loudspeakers with fans everywhere singing along after some guy absolutely mashed a hanging slider into the bleachers for a game winner in the bottom of the ninth. Yep, no hanging sliders to 4 hitters with the game on the line, got it I understand that truth now.

But looking back to the larger picture, most people washed out because their skills just weren’t good enough. They didn’t throw hard enough, change speeds well enough, or command the strike zone well enough. Or from a batter’s perspective they couldn’t hit lefties, they had a tendency to roll sliders over, or were impatient to a fault. Some were taken from the game because they weren’t focused enough, had off the field issues, or weren’t really in it for love of the game. And the rest? This is where most people get it wrong. The rest were taken out because they weren’t consistent enough. They could perform at a high level a day here or a day there, but the absolute GOATs were the ones that performed at a high level 9.5 out of 10 days. It was not the absolute level of skill at any part of the game, but the ability to perform with consistency year in and year out.

When you think about it, in sports “winning” is pretty easy to define and there’s nowhere to hide. You’re either growing as a player, constantly improving, constantly performing at a high level, or you’re writing Substacks on banks like me. For teams winning was winning the World Series. For individual players, being the most valuable at your position. Pretty simple.

But what does it mean to perform well or win as a publicly traded company?

I think this is fairly black and white. Total Shareholder Return is the number one measure of if you’re doing well or not as a stock company. I know that you can only do this in the Bezos sense if you’re customer first, but there’s really no fudging shareholder return numbers. And you can’t pay employee salaries with cash you don’t earn or shares that aren’t worth much. In fact, stock go up & value created = good. Stock go down & value destroyed = bad.

But what drives total shareholder return?

To me this is also black and white (for the most part) and this is what I believe drives the majority of the returns for public companies. Your company’s value is derived from your ability to grow revenue (top line), earnings (bottom line), and book value over time and into the future. And since we don’t live in a bubble, these metrics should be compared to the types of companies you compete with, but also the broader market. And even though we don’t want to admit it, as a bank you are competing with META or GOOG for talent. And you are competing with OZK or PNFP for lending talent if you’re a small community bank.

Why do I say for the most part? Because there are some Soros style reflexive elements to total shareholder return. The main one being that not only do your fundamentals matter (ability to grow top line, bottom line, & book value), but also people’s perceptions of your future fundamentals. In Bank Land, this point being made by the depressed valuations of CRE banks and KRE in general. Despite seemingly sound fundamentals market participants are nervous about future fundamentals due to credit so they assign a cheaper multiple. Is it fair or is it foul? Only time will tell, but for now it does impact shareholder returns for the group.

A logical opposite extreme would be out of Bank Land in Nvidia. People are willing to pay a premium for Nvidia today because they have seemingly out of nowhere (to some) started growing revenues 22% QoQ on a $22 billion number which is also up 265% YoY. Now we could debate whether or not they’re worth 37 times sales or 15 times sales, but that would be missing the point. The point is the market has always and will always reward GROWTH. I’ll say that again, the market has always and will always reward growth.

And so where does that leave us for banks? Banks are not big growers, we know that. But what you may not be surprised to find is that the long-term top performing Total Shareholder Return banks are the ones that produce, drumroll please …. GROWTH. And by growth I’m referencing growth in revenue per share, earnings per share, and TBV per share annually. Given this, an intelligent bank investor should start by trying to find the banks that have a track record of outgrowing their peers across those three metrics.

Munger called this buying a wonderful business, one that performs well over time come rain or shine. Munger knew of course that a company’s past performance is NOT a predictor of future success, but they absolutely do give you valuable information on what you can reasonably expect going forward. This is because over a longer time period, like in baseball the best banks will consistently outgrow & out earn their competitors. And even though anyone can have a flash in the pan single season, if someone hits .300 for 5 or 10 years, there’s a pretty good chance they’ll continue being a .300 hitter into the future. Could they stumble? Sure. But I’d bias to a .300 hitter continuing to be a .300 hitter first.

And the other part of Munger’s famous quote was that you should pay a fair price. Determining fair price in Bank Land often times comes with a discussion of all the fun metrics of the day: CRE ratio, COF, NIM, TCE, NPL, NCO, ALLL, GAP Ratio, and on and on. And those metrics do matter, but my argument is they matter second or third. First, focus on the bank and the team’s ability to grow top line, bottom line, & book value. Then assess if the price for said growth is fair or not. And then do some work on whether or not you believe their performance is sustainable into the future. And of course, check your proxy for CEO comp, look at the insider ownership, and all the obvious stuff.

Relative Growth Score

I spent time on this selfishly, but now I want to share it with you all.

I started deliberately with big banks, banks with more than $50 billion in assets, those are below. Next, I’ll release the $10 billion to $50 billion in assets. Then the sub $10 billion in assets. And lastly the combined list of all banks, showing who has grown in excess of all banks. And on that list, you’ll find some of the bank’s that the smart money investors love, and you probably don’t know about. And also, on that list you’ll find some wonderful businesses at fair or even great prices. This is how you win in bank investing and put yourself in a position to win. At least in my opinion and paid subs will have access to them all.

What is this relative growth score?

Relative growth score (RGS) is a metric that shows a company’s ability to grow top line, bottom line, and tangible book value per share relative to a peer set. While growth in these three metrics historically has correlated to increased stock performance, past performance does not indicate future performance. The RGS measures the Compound Annual Growth Rate (CAGR) of three main metrics over four different time horizons. Revenue per share, earnings per share, and tangible book value per share CAGR are measure over the past 1 year, 3 years, 5 years, and 7 years. Points are added and subtracted from companies based on their ranking within the cohorts (i.e. 0-25%, 25-50%, 50-75%, 75-100%) and different time horizons are weighted differently (i.e. 3 year is worth more than 1 year). A perfect score of 1 means a company is in the upper percentile on all factors over all horizons in their peer group. A perfect negative score of -1 means a company is in the lower percentile on all factors over all time horizons in their peer group.

So enough of me describing it, onto the list.

Big Bank Relative Growth Score (RGS) List