At first glance, banks may seem too boring or too confusing for the individual investor. Look through financials such as Bank of America's
Take Wisconsin's largest bank, Marshall & Ilsley
Net interest income is a bank's main source of revenue. It is simply the difference between what a bank pays to obtain funds and what it gets for lending them. This differs from most other industries, where interest is only a small portion of income.
Net interest margin is a bank's net interest income divided by the average loans and investments used to generate that interest income. A high margin indicates that the bank is effectively using assets to generate net interest income. M&I had a margin of 3.33% in yesterday's reported second quarter, which was down from 3.61% in 2004.
Other terms such as the "efficiency ratio" float around these reports. The efficiency ratio can be calculated several different ways, but the easiest is to divide non-interest expense by total revenues. If a bank pays out cash to maintain a large infrastructure of branch locations, it better be generating respectable revenues; otherwise the efficiency ratio will increase. For M&I's banking operations, this ratio was 47.7% in yesterday's second quarter versus 48.8% in fiscal 2004.
Before investing in a bank, be sure to check out the different businesses it's involved in. Many banks, including M&I, are diversifying away from traditional banking, and this can add complexity. This doesn't mean stay out; you just have to do extra research before buying. Our own Mathew Emmert can help you get started. He has recommended two high-yielding banks for Motley Fool Income Investor subscribers: Amsouth
Fool contributor Matt Thurmond has no financial interest in any company mentioned in this article.