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7 Charts You Need to See Before Investing in a Bank Today

Considering investing in a bank stock? Before you do, take a moment to survey the industry in these seven charts. There are some critical trends playing out right now, and understanding them will be a big help in finding the perfect bank stock for your portfolio.

1. The number of banks continue to shrink
The banking industry has been consolidating for years now, and in the post-financial-crisis world, that trend has continued.

At the start of 1984, there were 17,886 banks in the U.S. At the start of the 2015 third quarter, there were only 6,348 left. The trend is changing the dynamics of the industry, and therefore, understanding how it's happening is critical to making a successful, long-term bank-stock investment.

Some of this consolidation has been driven by bank failures -- primarily, the Savings and Loan Crisis of the late '80s and early '90s, and followed by the financial crisis in the late 2000s. Some of the consolidation has also been driven by mergers and acquisitions; banks today are considerably larger than they were in prior generations.

2. The biggest banks are gobbling up a majority of industry assets
Between all the M&A and bank failures, the largest U.S. banks have ended up with a huge share of industry assets.

The 111 largest U.S. banks, those with at least $10 billion in total assets, control 81.4% of all the assets in the banking industry as of the second quarter.

The four U.S. megabanks -- JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) -- combine to control $8.15 trillion in assets. That's 52% of the entire industry.

However, during the past five years, these behemoths have had a more difficult time finding growth. JPMorgan saw its total assets increase just 14% from the second quarter of 2010 through Q2 of 2015. Citigroup and Bank of America both shrank during the same period, losing 7.75% and 8.15% of total assets, respectively. Wells Fargo has been the only mega bank to find meaningful growth, boosting assets by 41% during this five-year period.

This dynamic implies that the large, but not-quite-mega banks have been driving the increased concentration of industry assets, at least during the past five years.

3. Understanding the changing growth dynamic is one thing, but aren't we in this for profits?
Growing fast, and controlling heaps of capital, does not necessarily equate to strong returns, a fact we can see by looking at the breakdown of the industry's return on assets.

The largest banks are reporting decent returns on assets, but their performance is in no way outshining the numbers being reported by mid-sized competitors. The smallest banks, however, do clearly lag the rest of the industry.

During the past four quarters, banks with total assets between $1 billion and $10 billion have reported better returns on assets than their larger competitors. In the 10 quarters before that, these mid-sized banks matched or beat the large bank segment six times.

4. and 5. Why? A few reasons.
To dig deeper into the question of profits, a good place to look is the efficiency ratio. The efficiency ratio is calculated by dividing a bank's...


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