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Large commercial banks are not necessarily better than small community banks based on various quantitative measures. That is the conclusion of a new research report published by A.M.Best titled “Community Bank Advantages Challenge Historical Assumptions“.

The study assumed banks with assets of $5 billion or more as large banks.

The following are some of the key points from this study:

  1. Small community banks tend to focus on the local market and build on relationships, thereby providing stability and limiting risk
  2. Large banks take on more leverage and complex risk exposures and tend to have concentration risk such as the overexposure to subprime mortgages as revealed during the global credit crisis
  3. Small banks are better capitalized with their Tier 1 risk based capital and tangible equity ratios higher than large banks
  4. The Return of Equity (ROE) and Return of Assets (ROA) of community banks decline slowly relative to larger banks in adverse market conditions
  5. Community banks historically have had Median Tier 1 Risk Based Capital ratio of 2.17% and 3.67% higher than large banks since 2005
  6. The total charge-offs and provisions for loan losses to average total loans are lower for smaller banks than large banks

So in a nutshell, super-banks such as Wells-Fargo (NYSE:WFC), Citibank (NYSE:C), Bank of America (NYSE:BAC), JP Morgan Chase (NYSE:JPM) and large banks such as Fifth Third Bank (NASDAQ:FITB), Regions Financial (NYSE:RF), etc. are no better than small community banks. Despite their size, they do not diversify their risk exposures, do not have high market pricing power, do not offer high soundness, safety and performance, etc. Some of the top performing small community banks such as SVB Financial Group (NASDAQ:SIVB), Westamerica Bancorp (NASDAQ:WABC), First Financial Bankshares (NASDAQ:FFIN), Glacier Bancorp (NASDAQ:GBCI) can be found in the Bank Director magazine’s 2009 rankings list.

Of course, not all small banks are well managed banks since most of the banks that have failed so far since the credit crisis began are small to medium-sized banks. On a whole, the majority of small banks are better run than large banks as proven by the comparison of various measures in AM Best’s report .

The full report is available here.

Source: Large Banks vs. Small Banks