1 Critical Thing to Watch at Bank of America Corp, Citigroup Inc, and Wells Fargo & Co

Bank of America, Citigroup, and Wells Fargo will all be announcing earnings soon, and investors must keep an eye on this one number to truly gauge how well these banks are doing.

Jul 7, 2014 at 11:00AM

With the calendar turned to July, the second quarter is officially in the books. And with earnings season just around the corner, there is one thing investors must watch when Bank of America (NYSE:BAC), Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC) announce earnings.

What is it? If they report increased income, make sure the banks -- and not only these three -- actually did just that.

The vital number to watch
Without diving too far down into the numbers, banks are remarkably simple. They earn net interest income -- what they take in from loans minus what they pay out on their borrowings -- and noninterest income, which are those fees charged to customers. And they of course have expenses, which are paid out to keep everything running smoothly. Add the first two together, and subtract out the expenses, and boom, you have their pretax income.

Homework By Mikael Miettinen

Source: Flickr / Mikael Miettinen

While banks like Bank of America, Citigroup, and Wells Fargo are absolutely massive -- with nearly $5.5 trillion in combined assets -- at their core, they're quite simple.

But the thing is, there is one number that has a massive impact on the bottom line of the banks, but all too often it goes undiscussed, known as the provision for credit losses.

Understanding the number
The provision for credit losses is what a bank expects to lose on the loans it has written. While banks do their best to ensure they won't write loans that will go bad, ultimately they understand some will.

As a result a bank will do its best to calculate what those losses may be and in turn place that money into its loan loss reserve to help insulate itself, if -- or regrettably, when -- some of those loans go bad. And this is one expense a bank recognizes each and every quarter.

While there is a wide variety among what the banks expect to lose -- that is another story for another day -- you can see Bank of America, Citigroup, and Wells Fargo all saw their provision for credit losses decline dramatically through the first three months of the year:

Source: Company investor relations

Combined, they expected to lose an astounding 40% less -- or $2.1 billion -- through the first three months of this year relative to last year. This is undeniably good news for these banks.

But the thing is, it's also critical to remember this is just an estimation, and it doesn't represent any actual difference in the earning capability of the businesses underlying the banks. But since it is considered an expense, a reduction in this number translates to the income rising.

And as you can see, while the bottom line results improved significantly at these banks, in the case of Citigroup and Wells Fargo, the gains were entirely the result of a reduction in this one line item:

Source: Company investor relations & author calculations

That's not to say these banks didn't show improvement, as a reduction in losses undeniably benefits shareholders, but the gains weren't necessarily an indication of improved operations and increased income as a result.

Of course, it must be noted too the first quarter of last year saw a massive boom in refinancing, and in many ways that too was an anomaly. After all, Wells Fargo saw its mortgage banking income drop by 46%, from $2.8 billion to $1.5 billion in the first quarter.

The key takeaway
With these banks just weeks away from announcing results from the second quarter, in order to truly understand the performance of their operations, make sure when you are gauging the earnings, you also take a look after excluding the provision for credit losses. While it is a very real benefit, it is one that can't be recognized forever.

Bank of America + Apple? This device makes it possible.
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its destined to change everything from banking to health care. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here

Patrick Morris owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers