Here's Why B of A Investors Should Worry About Wells Fargo's Earnings

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To a very large extent, it was investors' high expectations that did in Wells Fargo's  (NYSE: WFC  ) stock after the bank announced earnings.

But as investors start to look ahead to next week -- when we'll be seeing a veritable tsunami of bank earnings reports rolling in, including numbers from Bank of America  (NYSE: BAC  ) -- there were a couple of worrisome points in Wells Fargo's release that they should take note of.

Oh, that NIM
First, Wells' net interest margin -- difference between what the bank earns on its loans and investments and what it pays to depositors and other lenders -- shrunk. A smaller NIM means smaller profit from the interest-earning portion of the business.

This shrinking NIM is not just a Wells Fargo issue, it's an industrywide issue. The Federal Reserve's aggressive actions to lower interest rates and spur the economy is most definitely doing the former, and that hasn't been golf-clap worthy at banking institutions in recent quarters. Will Bank of America see a similar slip in its NIM? Most likely.

Mortgage madness
Second, there was a meaningful drop in the mortgage activity at Wells Fargo. Part of the offset to shrinking NIMs at the banks is the fact that lower rates have sparked a mortgage boom -- particularly when it comes to refinancing. This has led to a nice stream of fee income for the banks when they originate those loans and sell them off. Obviously, if that boom starts to cool, then we'll see a reduction in fee income.

If Wells Fargo saw a slowdown this quarter, it seems reasonable to expect that B of A might have seen the same. However, in the case of both banks -- as well as banks more generally -- I'm reluctant to take a single quarter as a sign of a true trend. The key will be to watch how this looks across the sector this quarter and whether we see more of the same next quarter.

A millstone for B of A?
Now, for the billion-dollar question: If we do see these same issues pop up at B of A, will its stock also sell off in the wake of earnings? I could flip a coin and take a guess -- Mr. Market is an unpredictable chap -- but what I can say is that B of A's stock is off nearly 2% as of this writing, following Wells Fargo's report. So it would appear that investors are already pricing in some negativity.

Plus, when it comes to Bank of America, there are so many "not of the normal course of business" issues -- mostly of the, ahem, legal variety -- that investors may be looking at slightly different signals when its release comes out. The day that core business issues are once again the main concern for B of A is probably a much brighter day for the bank and its investors in general.

Of course investors should be tuning in for Bank of America's earnings report, but the success or failure of the bank's shares lie in its long-term performance rather than one quarter's results. For an in-depth view of B of A's big picture, check out our company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.

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8/26/2016 4:00 PM
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