Who Has Better Core Earnings: Fifth Third, PNC, or BB&T?

Comparing and contrasting net interest margins at three of the most prominent U.S. regional banks.

Jay Jenkins
Jay Jenkins
Jul 25, 2014 at 2:09PM

The horsepower behind long term bank profits is the bank's core earnings. That is most easily represented by a bank's net interest margin -- the spread between the interest it makes on loans and the interest it pays out to depositors.

Let's take a moment to compare and contrast this figure for three prominent regional banks in the U.S.: BB&T (NYSE:BBT), PNC Financial (NYSE:PNC), and Fifth Third Bank (NASDAQ:FITB).

We'll use the most current filings from each bank's regulatory call reports so we can break down the numbers into a bit more detail. We'll use the FDIC's definition of net interest margin as well, that is the bank's total interest income less total interest expense (annualized) as a percentage of average earning assets for the given period.

BB&T reported net interest margins of 3.23% for the first quarter. The loan portfolio produced a yield of 3.64% and the bank's cost of funding was 0.41%. 

Source: BankRegData.com

BB&T has five main portfolios that drive core earnings. Yields for each of those portfolios are broken down in the table below.

Portfolio Yield
1-4 Family Residential 4.20%
All Other Real Estate 4.53%
Commercial & Industrial 2.95%
Auto & Other Individual 4.68%
Mortgage Backed Securities 2.33%

For a complete review of BB&T and it's stock, click here.

PNC Financial
PNC Bank produced an identical net interest margin as BB&T at 3.23%. However, PNC's margin was driven by a lower yield on loans and a lower cost of funding at 3.50% and 0.27% respectively.

Source: BankRegData.com

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PNC's yields were driven by heavy concentrations in three portfolios.

Portfolio Yield
1-4 Family Residential 4.63%
Commercial & Industrial 3.88%
Mortgage Backed Securities 3.17%

Fifth Third
Fifth Third reported a net interest margin of 3.48% as of Q1. The yield on the bank's loan portfolio was 3.7% less the yield on the banks funding of 0.22%.

Source: BankRegData.com

The four largest contributors to the bank's core earnings were the 1-4 Family Residential, Commercial & Industrial, Auto & Other Individual, and Mortgage Backed Securities portfolios.

Portfolio Yield
1-4 Family 3.77%
Commercial & Industrial 3.80%
Auto & Other Ind. 4.07%
Mortgage Backed Securities 3.47%

For a complete review of Fifth Third, including its stock's valuation, click here.

Foolish takeaway
Here's how the comparison breaks down, side by side:

Among these three banks, Fifth Third has the best net interest margin. The bank sports both the highest yield on its loan portfolio and the lowest cost of funds. In terms of core earnings, that's about as good as you could hope for!

When interest rates rise, net interest margins at all banks will expand. When that happens, all three of these banks are poised to quickly grow core earnings. If you had to choose one of the three though, Fifth Third is best positioned to capitalize.