January 15, 2013
After spending nearly the entire day in the red, stocks turned things around in the last hour of trading, with the Dow (DJINDICES: ^DJI ) and the broader S&P 500 Index (SNPINDEX: ^GSPC ) finishing up 0.2%, and 01.1%, respectively.
JPMorgan's earnings: The 2 numbers that matter
Wells Fargo (NYSE: WFC ) was the first of the major banks to report earnings last week. Tomorrow, JPMorgan Chase (NYSE: JPM ) will follow suit. Bank earnings releases, particularly for a universal bank like JPMorgan contain reams of data, but some numbers are more telling than others. The market will be tracking the following two numbers closely:
- Net interest margin: The Fed's extraordinary monetary policy regime has had a mixed impact on banks. On the one hand, the zero-interest policy means that banks' cost of funding is essentially zero – very favorable. On the other hand, the Fed's bond-buying programs depress long-term interest rates and, by extension, the rates at which banks are able to lend money. The metric that reflects the net effect on banks' profitability is the net interest margin, which "does what it says on the can," capturing the difference between a bank's borrowing cost and its lending rates.
For the first nine months of 2012, JPMorgan's net interest margin was 2.5% -- the lowest it's been for the nine months of any year since 2007. Wells Fargo's net interest margin dropped to 3.56% in the fourth quarter, from 3.66% in previous quarter and 3.89% in the prior year period. That drop may explain why Wells' shares performed no better than the overall banking sector last Friday, despite earnings that beat analyst expectations.
- Loan growth: One way a firm can compensate for low per-unit profitability (i.e., low net interest margin) is through volume growth. In terms of loan growth, banks also face a challenging environment: Loan demand in a halting recovery is sluggish and banks have instituted more stringent credit standards in the aftermath of the credit crisis.
As bank valuations have begun to normalize -- at 1.26, JPMorgan's price-to-tangible book value is now the highest it's been since the first half of 2012 -- investors' focus will begin to shift from shares' discount to net worth to earnings power. The "easy" money may have been made, but this is still a game worth playing.