Puerto Rico-based Doral Financial
The fourth-quarter earnings report, released Tuesday evening, suggests that things might be cooling off a bit. Doral originated about $2 billion in new loans during the quarter, up 17% from the same time last year but basically flat compared with the third quarter. Curiously, the company's provision for loan losses decreased year over year from $2.8 million to $1 million -- so although the company made 17% more loans, they reported a lower provision for bad loans.
What's more, the company took a $97 million loss from investment trading activities. Were it not for a $77 million tax benefit relating to changes in the capital gains tax in Puerto Rico, the company would have reported nearly a 40% sequential drop in income.
Of more concern, the company's net interest margin (essentially a measure of a bank's moneymaking capability) appears to be shrinking. The company didn't officially state its net interest margin, but a rough back-of-the-envelope calculation suggests a number around 2.2% -- a figure that would be below both year-ago and third-quarter results.
Compare this figure with the 4.04% margin reported by BB&T Bank
Doral may be in for a double whammy. Not only does the bank have a somewhat narrow net interest margin to begin with, but also it has an unusually high concentration of investment securities as part of its interest-earning assets. Should the yield curve narrow further, Doral will find it increasingly difficult to make money from that spread, and profits will suffer.
Although Doral doesn't appear terribly overvalued at a price-to-earnings ratio of about 12 on trailing earnings, the possibility of a worsening yield curve and the company's comparatively low interest margin suggest that investors should proceed with caution. By the same token, Doral's strong operating history and Puerto Rico's incredibly strong housing market should provide some downside protection for those holding the stock.
Fool contributor Stephen Simpson holds a CFA. He has no ownership interest in any of the stocks mentioned.