Long time readers know our marketing love affair with Heinz Ketchup. We worship the perfection of the recipe, we lamented that it took so long for mankind to figure out how to turn the bottle upside down and today we point to the squeeze bottle. One of the biggest sales boosts that Heinz ever received with its ketchup line was when it moved to the squeeze bottle in the early 2000’s. While helpful for the rest of America, what it really did was give kids everywhere an element of control. When you’re little, you don’t get to do too much in this world and when you can control something, even something simple like Ketchup, you’re pretty happy. Kids loved the new bottle, which prompted them to over-squeeze ketchup all over the place (which is why parents don’t let them control too much) and, presto, Heinz experienced a 20%+ pop in sales.
That element of control is one reason why the pre-tax, pre-provision earnings (PPE) metric for banks has caught on. This metric, or “pre-pre†as it is often referred to, gives a view into a bank’s “core†earnings, not including the volatility of building reserves and the associated impact of taxes (including any net operating loss credits). Bankers like it because it is a whole lot better than talking about negative net income. Analysts like it, as it tends to be a less volatile measure of earnings, absent any unpredictable credit provisions. In almost every earnings call we have listened to recently, management has highlighted PPE.
To be fair, PPE doesn’t give a complete picture of a bank’s financial health and it will be interesting to see if it is as widely used when credit improves and reserves are being reduced. For now it is the metric of the day for banks. The industry has even gone one step further and now talks in terms of pre-pre ROE, which gives the earnings over capital. For most banks, this number is around 7.4%, after hitting a low point in 2009. While the number should probably be north of 18.5% (the 10Y average), when you consider all the headwinds of banking (FDIC assessments, record low NIM and a host of other issues), it is not bad just to be positive these days.
The good news is that pre-pre ROE may tick higher in 1Q for the first time since 2008. It is, of course, highly dependent on NIM and that looks like it will improve. Funding costs for banks hit an all-time record low back in Feb, a trend that appears to still be holding for Mar. In addition, loan pricing looks like it will increase slightly, producing higher NIM for 1Q. The 2 wild cards are non-interest expenses (which appear to be stable for the first 2 months of the year) and charge-offs (which get calculated into PPE). Here, the “1Q Effect†should play out as it has for almost every year since 1990 (most banks operate on a calendar year and tend to be more aggressive with charge-offs for the 4Q year-end close compared to 1Q the following year). This has held true for every year for the past 25, with 2008 being a notable exception (average improvement is about 30bp from 4Q to 1Q).
Before you figure out whether you want to utilize pre-pre ROE as a metric, we have prepared a supplement that ranks each bank and gives a comparison for the past 5 quarters. To see the specifics on your bank click here and look on the bottom right of the page.
As for Heinz Ketchup, stay tuned, as we understand that they may be coming out with another update to their packaging designed to boost sales.