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How to Read Bank Earnings

Earnings season usually kick off with the Banks which is always good for us because it gives us a feel for what to expect for the season. The larger banks have a finger on the pulse of the US and global economy.

Even if you don’t own any stocks in the banking sector, it’s always a good idea to keep track of what the banks are reporting.

I had originally written this article in April 2021, and I still refer to it as a cheat sheet to decode bank earnings in general. I am reposting this as a reference for everyone. As always we have earnings previews for the companies and banks in particular and that is a separate note.

Why the Banks are Important for Earnings Season

Because the larger Banks deal with companies from across industries and sectors, they provide a good indication of the level borrowing and spendinImportant Ratios to Considerg which tells us where the economy is headed. An increase in the level of borrowing and spending can signal optimism for economic growth.

What to Look out for in the Earnings Reports

I’ve always found a bank’s financial reports to be challenging. Even though I worked in banking for over 14 years, I never really got used to them. But, I did a learn a few things along the way to help understand them better.

Here’s what I look out for when I review bank earnings report:

  • Net Interest Income (NIM) = ⬆️ Higher better

  • Credit Provisions = ⬇️ Lower Better

  • Return on Equity = ⬆️ Higher better

  • Tangible Book Value of Equity per Share = ⬆️ Higher Better

  • SLR Ratio = ⬆️ Higher Better (min. 3%)

  • CET1 Ratio = ⬆️ Higher Better (min. 4.5%)

  • Efficiency or Overhead Ratio = ⬇️ Lower BetterImportant Ratios to Consider

  • Share repurchase = ⬆️

You can screenshot the above list and keep it handy on your phone. 🙂

Let’s break these down.

Important Ratios to Consider

Net Interest Margin (NIM) ⬆️

Net Interest Margin = (Interest on Loans - Interest on Deposits) / (Avg. Interest-Bearing Assets)

This is like the Gross Margin and therefore, we want this to be improving. It gives you the basic profitability for the Bank and the recurring net revenue. The other source of income is the Net Finance Income (NFI), which are usually fees that are collected by Banks. However, the Net Finance Income could be one-time, and is usually not very predictable.

Credit Provisions (aka Loan Loss Provisions) ⬇️

When a Bank doesn’t expect to be paid back on its loans, they take provisions. Last year, most Banks obviously took a sizable amount of provisions, particularly across the retail sector. With unemployment increasing, the Banks expected to be met with a large number of defaults on home loans and credit cart debt.

However, the last quarter also saw a Release of Loan Loss Provisions by some of the bigger banks. So, we want to look out for more releases, since this tells us that fewer people are defaulting, so the state of the economy is improving.

Return on Equity (ROE) ⬆️

ROE = Net Income / Total Shareholders’ Equity

ROE is similar to any other company and it gives us an indication of how much income the Bank is generating for the shareholders.

Sometimes, Banks will also use the measure ROTCE or Return on Average.

Tangible Common Shareholders’ Equity (ROTCE), where:

Tangible Common Shareholders’ Equity = Total Equity - Preferred Equity - Goodwill - Intangible Assets

ROE = Net Income / (Total Shareholders’ EquHow to Read Bank Earningity + Total Long-Term Debt)

Tangible Book Value of Equity per Share ⬆️

Tangible BV of Equity = Total Equity - Preferred Equity - Goodwill - Intangible Assets

I do not like Goodwill. To me, this is a solid measure of the real value of the Bank. I like this measure because it suggests that this is what the Bank is really worth, once you strip out all the fluff.

SLR (Supplementary Leverage Ratio) ⬆️Important Ratios to Consider

SLR = Total Tier 1 Capital / Total Leverage Exposure:

(Total Leverage Exposure = Both on-balance sheet and off-balance sheet exposures such as over-the-counter derivatives, cleared derivatives, repo-style transactions, and other off-balance sheet exposures.)

Calculating this ratio is a slightly tricky so most banks will give you this number in their results. The minimum level that banks have to maintain is 3%.

If you don’t have the SLR, then another measure you can use is the CET1 Ratio which should be a minimum of 4.5% according to Basel III regulations. This ratio will generally be higher than the SLR.

CET1 Ratio = Common Equity Tier 1 Capital / Risk-Weighted Assets:

Banks are always subjected to more regulation and one of the outcomes of the 2008 Financial Crisis, was mandating banks to maintain a higher level of capital. The higher the Bank’s capital ratio, the more it is able to withstand shocks.

Note on SLR: Due to the Pandemic in 2020, banks were asked to change their calculation of SLR to exclude US Treasuries and Deposits with the Federal Reserve from the Total Leverage Exposure. This obviously allowed the banks to lower their capital reserves, in essence allowing them to lend more. As of March 2021, this concession has been reversed and we should where the banks now stand.

Efficiency Ratio (aka Overhead Ratio) ⬆️

Efficiency Ratio = Non-Interest Expense / Net Revenue

This ratio tells us how much the bank is spending to make to money. It tells us if the banks is overspending or they’re running a tight shop. Ideally, we want this ratio be lower than 50%.

Share Repurchase

Share repurchases for the Banks were also halted for most of 2020. In December, the Fed allowed Banks to resume share buybacks in the first quarter of 2021.

While JPM already announced a $30B buyback immediately following the announcement, the first quarter results should give us an indication of further plans for all the banks. Buybacks affect dividend payments and how cash is deployed, e.g, for investing in technology.

So, it’s important to see what the banks have in store.


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