FBR Capital sees healthy mortgage banking activity this year
Mortgage banking activity in the fourth quarter was flat from the third quarter but up 35% from the first half of the year as low mortgage rates spurred refinancings, FBR Capital Markets said in a research report Monday. The report said refinancing now accounts for 80% of all originations and is likely to remain a significant part of new activity as the HARP 2.0 refinancing program kicks in this quarter. Looking ahead, the report's author Paul Miller sees banks "poised for a material rebound" from 2011 when they were rocked by political and regulatory uncertainty. Miller said valuations for large-cap banks are now compelling because of regulatory scrutiny and the fact that extreme economic scenarios are already priced in. Still, he said first-quarter bank earnings could be weighed down by lower net interest margins from tighter interest rates spreads. In addition, he believes earnings could be impacted by reduced interchange fees and slower reserve releases. "Combine this with the possibility some banks could see the fourth quarter (of 2011) as an opportunity to clear the decks prior to starting 2012, and we could see some downside surprises. However, most of these scenarios are likely priced into valuations at this point, and we have seen a series of positive economic numbers in the near term." Overall, he sees mortgage banking activity continuing to improve and also more growth when it comes to bank balance sheets. He recommends investors look at large banks like Wells Fargo, U.S. Bancorp and JPMorgan. In the year ahead, net interest margins are likely to contract considering the 120-basis-point reduction in the 10-year Treasury yield in the third quarter of 2011 and fewer benefits from deposit repricing, Miller said. Overall, Miller believes net interest margins will contract over the next few years as banks continue to become acquainted with lower interest rates. Write to Kerri Panchuk.