If you're a current or prospective investor in Wells Fargo (NYSE:WFC) or any of the other too-big-to-fail lenders, then pay close attention this week. On Friday, the nation's fourth largest bank by assets reports earnings for the final quarter of 2012. To make it easier on you, here are the three things investors and analysts will be (and should be) watching for.
1. Net interest margin
If there's one number that could cause Wells Fargo's share price to rise or drop precipitously on Friday, it's the net interest margin. This is unquestionably one of the most important metrics in all of banking. It's calculated by subtracting a bank's cost of funds from its yield on earning assets. And it's no mere coincidence that the figure is located on the tippy top of a bank's income statement.
Following its third-quarter earnings release last October, shares of Wells Fargo were sent to the pillory after the company reported a 25-basis-point drop in its pivotal net interest margin, opening lower by nearly 4% on the day of the announcement. Paradoxically, the drop was caused by faster than expected deposit growth the preceding month and conservative liquidity management -- both of which are positive signals that will pay off down the road.
This time around, analysts will be looking for Wells Fargo to, at the very least, slow the rate of decline and, ideally, to reverse the trend. The benchmark figure for the third quarter was 3.7%. By means of comparison, the analogous figures for JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), and Citigroup (NYSE:C) were 2.4%, 2.3%, and 2.9%, respectively.
2. Mortgage origination volume
In case you haven't gotten the memo, Wells Fargo is now the largest mortgage originator in the country -- click here to see a list of the top five. And I don't mean by a narrow margin. The California-based bank originated a staggering $139 billion in residential mortgages in the third quarter of last year. The runner-up, JPMorgan, notched $44 billion in new mortgages -- which, mind you, was itself a record for the nation's largest bank by assets.
Here's a graphic to help you truly appreciate the extent of Wells Fargo's domination in this area:
As you can see, Wells Fargo single-handedly dominates nearly a third of the country's mortgage origination market. According to its executives, in fact, it has relationships with a staggering one out of every three American households, giving it a valuable foot in the door to capture additional wallet share.
Despite the company's domination, however, analysts will be looking for Wells Fargo to grow its mortgage origination business, and thereby increase the amount of noninterest income that it collects as a result. The more discerning of analysts, moreover, will be eyeing the mix between sui generis originations and those related to refinancings -- in the third quarter, 72% of all mortgage applications were of the latter variety.
3. Cold hard cash
Call me Captain Obvious, but the final thing to watch for when Wells Fargo reports earnings on Friday are just that, earnings. Given its position in the mortgage market, it should come as no surprise that the bank is making money hand over fist.
For the 12 months ended Sept. 20, 2012, it earned a staggering $17.9 billion. In case that doesn't impress you, over the same time period, as I've noted previously, Wal-Mart earned $16.6 billion and McDonald's a measly 5.5%. The only blue-chip companies to out earn it over those 12 months were the nation's largest bank by assets JPMorgan and the two oil giants Chevron and ExxonMobil. In other words, thanks to its 2008 acquisition of Wachovia, Wells Fargo is firmly implanted in the big leagues.
Growth nevertheless remains the name of the game -- and particularly for a bank like Wells Fargo, which trades for a dear 1.7 times tangible book value. The benchmark figures in this regard are $4.9 billion and $4.1 billion; the former is the amount it earned in the third quarter of last year, and the latter is the amount it earned in the fourth quarter of 2011. Suffice it to say, while a slightly lower number than the former may be excusable, anything less than the latter would be treated apocalyptically.