The 5 Numbers That Matter Most in a Bank's Earnings Report
Key Points
While the premise of the banking business is simple enough, its sheer size and accounting complexity make it difficult to figure out how much risk a bank poses.
Fortunately, all banks disclose all of the relevant fiscal information an investor might want to know.
A small number of these metrics are enough to give you a firm handle on a particular bank’s health.
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Most major banks, including JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), and Wells Fargo (NYSE: WFC), have already reported their third-quarter earnings. And all in all, they weren't great.
JPMorgan's numbers came up short, as did BofA's. Although Wells Fargo's earnings topped estimates, revenue of just under $21.9 billion missed the analyst consensus of $22.3 billion. These stocks' performances have been mixed in the meantime.
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And this raises the question: What really drives the response to banks' earnings? These five metrics arguably mean the most.
1. Net interest income: When it comes right down to it, banks' core business is charging interest on loaned money they borrowed themselves. The difference between a bank's internal cost of borrowed capital and the interest it's collecting from its loan customers is net interest income, or NII. For perspective, a little over half of Bank of America's Q3 income was interest income.
2. Provision for credit losses: Although in some ways it seems like they shouldn't know, the fact is, most banks have a pretty good idea from one quarter to the next of how much of their loan portfolio is about to be written off as a loss.
3. Common equity tier 1: Common equity tier 1 isn't a measure that means much most of the time. When it does matter, though, it matters in a big way. Simply put, it's the amount of high-quality capital a bank can use to offset shock losses and continue to function.
4. Return on tangible common equity: A bank's return on tangible common equity -- or ROTCE -- wasn't always a concern, nor was it always calculated and/or disclosed. It only became prominent in the early 2000s, in response to unexpected but predictable trouble. Just as the name suggests, it's a measure of how much return shareholders are getting on their collective investment.
5. Earnings per share: Finally, while banks clearly have several industry-specific metrics to weigh, they're still businesses ultimately meant to generate profits. Per-share earnings remain an important, all-encompassing figure.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Wells Fargo is an advertising partner of Motley Fool Money. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.
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