Regions Financial (NYSE: RF) and SunTrust Banks (NYSE: STI) are pretty simple to understand. Both are regional banking players that make the majority of their money through lending. You won't find any London Whales, or high-flying investment banking divisions here.
With these banks, you'll find mortgages, commercial real estate, and business loans. You'll find deposit accounts and wealth-management options for everyday consumers. You'll find treasury management services for small and middle-market businesses. For a complete review of Region's business, click here.
If we all agree then that the traditional bank business model is what matters for these two banks, then to really understand the engine that drives profits, we must understand the two bank's net interest margins. Net interest margin is the difference between the bank's interest income from loans and the interest expense the bank pays out to depositors.
When analyzing banks like SunTrust and Regions, with assets north of $180 billion and $115 billion respectively, a few basis points in change can have a truly gigantic impact on profits in raw dollar terms.
Taking the long view, when interest rates begin to rise again in a few years, the banks that have strong net interest margins will be the institutions that see the greatest revenue and profit growth from that change in monetary policy.
Want to know which banks will be the most profitable in five years? Start by looking at net interest margin.
In the video below, Motley Fool contributor Jay Jenkins takes a deep dive into the numbers for both Regions and SunTrust. On the surface, the banks look fairly similar; but Jay points out a few key differences that could be make or break for the long-term investor.