U.S. Banks: It’s Back...the Texas Ratio


Gerard Cassidy invented the Texas Ratio back in the late-1980s when he was covering Texas Banks and discovered that when nonperforming assets exceeded tangible capital plus loan loss reserves, the probability of bank failure was very high. We re-introduced the Texas Ratio into our bank analysis during the 2008 financial crisis, and a looming recession from COVID-19 has brought the Texas Ratio back into the spotlight. In this latest research report, we apply the Texas Ratio to the Top 20 U.S. banks to find out who is positioned to sink or swim.

Required Conflicts Disclosures

Bank health appears solid in the near term…

The Texas ratio takes a bank's non-performing assets and divides this number by the sum of the bank's tangible common equity and its loan loss reserves. A ratio of more than 100 (or 1:1) indicates that non-performing assets are greater than the resources the bank may need to cover potential losses on those assets. When we performed this calculation for the top 20 U.S. banks, the Texas Ratio was significantly below the critical 100% level, indicating that banks should be able to weather the COVID-19 storm in the near-term.

…but there could be trouble on the horizon 

Although the Texas Ratio is low for all of the top 20 U.S. banks today, we anticipate that as the impacts of the pandemic continue, we will see the ratio increase. Smaller banks with a significant volume of high risks loans will likely have the most credit troubles; it is likely that some of them will likely exceed a ratio of more than 100 during this credit cycle, and may be vulnerable to potential failure.

Credit is Key

Credit quality will be critical for a bank of any size to survive the market downturn from COVID-19. It is impossible to predict how long the coronavirus recession will last, but the duration will be a critical factor impacting bank health.

The Texas Ratio is straightforward, easy to calculate and understand, and has often proved to be an excellent indicator of a potential bank failure. Today, the Texas Ratio is widely used around the globe by investors, regulators, and bank management teams (see “Europe Fears Banks Lack Cash Cushion to Cover Bad Loans”, The New York Times, August 21, 2014). The Texas Ratio also was included in the book Guide to the 50 Economic Indicators That Really Matter.

Gerard Cassidy authored the research report “U.S. Banks: It’s Back...the Texas Ratio.” For more information about the full report, please contact your RBC sales representative.

For Required Conflicts Disclosures, click here. These disclosures are also available by sending a written request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7 or sending an email to rbcinsight@rbccm.com.


Gerard S. Cassidy

Gerard S. Cassidy
Managing Director, Head of U.S. Bank Equity Strategy and Large Cap Bank Analyst


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