Comerica (NYSE: CMA ) is on deck to announce earnings for its fourth quarter and fiscal year 2012, and investors need to pay special attention to the following areas of that release.
Net interest margin
Since Wells Fargo (NYSE: WFC ) is the only bank that has reported earnings thus far, it is necessary to look at the market's reaction to what were record earnings for the megabank. Unfortunately for the bank, investors and analysts looked at a declining net interest margin and sold off the stock, but it is almost as if they were cutting their nose off to spite their face. Noninterest income at the bank improved 16% from the same quarter last year, prompting me to question the sell-off.
That said, if Wells Fargo, which is generally regarded as one of the best big banks, can experience three quarters of declining net interest margin, what does that say for the prospects of a bank like Comerica, which is much smaller and generally not considered an elite-performing institute. This is why investors should take special note of the net interest margin in relation to previous quarters.
Performance of loan portfolio
As important as net income margin is for banks, it is also something that can be overcome by volume. If the interest rate spread ticks down a few basis points, a bank can offset some of the decline in the revenue by increasing the number of loans it issues. Comerica has been leading the pack among regionals in increasing lending, and should this continue, the bank should be able to overcome any shortcomings when it comes to net interest margin.
Investors can also look at nonperforming loans to see how well the bank's loan portfolio is performing. A decrease in this ratio indicates that the bank is improving the quality of its balance sheet by shedding bad loans, and higher income should result as more loans are actually performing as expected. On the other hand, an increase could be an indicator of bad loans in the past and would generally offset any gain from issuing more loans.
The consensus expectation from analysts is for Comerica to report $0.65 per share in net income, which would be in line with what was expected from the bank during the third quarter. The bank missed on these expectations last quarter, though it was the only quarter that the bank missed on over the past four quarters. For the full year, $2.66 in earnings is expected for the bank, which would be an increase of 27% from 2011. It will be very interesting to see if the bank can meet these expectations, so check back on Wednesday to see how they did.
One earnings release, and the market's reaction, should not be enough to detract you from investing in a company. To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.