Loans are the single most-important aspect of any bank. Take these three regional banks, for example. Is there any doubt that loans are the engine that drives the entire enterprise?
|Bank||% of Revenue from Loan Interest|
|First Niagara Financial Group (NASDAQ: FNFG)||72.5%|
|New York Community Bancorp (NYSE: NYCB)||88.4%|
|First Citizens BancShares (NASDAQ: FCNCA)||78.1%|
It seems obvious, right? These are banks, after all.
Knowing this intuitively, how often do you breeze over a bank's asset quality numbers, loan concentrations, yields, and the real fundamentals that drive long-term profits to, instead, focus on P/E ratios or profit margins or growth rates?
Banks are not created equal, and neither are loans. New York Community Bancorp, for example, relies very, very heavily on apartment loans. Those loans represent more than 70% of the bank's interest income. If you're not confident in the apartment market, then this bank may not be for you.
Or it might interest you to know that First Citizens BancShares and First Niagara Financial's cost of funding is a whopping 100 basis points lower than New York Community Bancshares. For a bank with $20 or $30 billion in assets, that translates to a whole lot of cash.
In all of these examples, the devil really is in the details. And these details are what separate a run-of-the-mill bank from a high-performing bank.
Today we break down real banking fundamentals
Today, Motley Fool contributor Jay Jenkins is going to break that cycle. In the video below, he deep dives into what is arguably the most important driver of bank profitability: net interest margins. Using the three banks above, First Niagara Financial Group, New York Community Bancorp, and First Citizens BancShares, Jay explains what net interest margin is, why it's important, and compares and uses the metric to compare and contrast these three regional banks.