Mortgage banking activity expanded 35% in the third quarter thanks to record-low interest rates and is poised to register strong growth in the fourth quarter, according to a new research report.
That's from a review of earnings at the 24 banks covered by FBR Capital Markets & Co., the research arm of investment bank FBR & Co. (FBRC)
"We originally expected 3Q11 to be strong for mortgage banking income given the significant increase in refinance activity that resulted from lower interest rates," says the report, authored by Paul Miller Jr., Rob Ramsey, Scott Valentine, Brett Scheiner and Kevin Barker. "However, the majority of refinances occurred in the back half of the month and many of the loans committed in 3Q11 will not actually close until 4Q11."
With refinance activity expected to remain high, the fourth quarter is set to be the best quarter this year for mortgage banking, according to the report.
We believe that some banks may be viewing residential mortgages in this environment as a better alternative to (mortgage-backed securities)," say the researchers, who suggest this could be the beginning of a trend toward banks holding mortgage loans in their own portfolios instead of reselling them to the secondary market.
Overall, FBR researchers said they are "incrementally more positive" on bank stocks heading into the fourth quarter, and they recommend investors favor "regional banks with solid revenue growth."
"We believe that some of the dire scenarios discussed may have hit bank valuations harder than underlying fundamentals indicate," the FBR analysts said. "The banks were able to show decent loan growth in select asset classes, net interest income looks to be more resilient than expected, and credit has continued to improve, albeit at a slower pace."
Median growth in loans for the banks tracked by FBR Capital Markets was 1.2% in the third quarter, mostly driven by an increased volume of commercial and industrial loans. The third quarter marked the first quarter of widespread growth for loan balances, according to the report.
The researchers' top bank picks are Fifth Third Bancorp. (FITB), Wells Fargo & Co. (WFC), PNC Financial Services Group Inc. (PNC), Webster Financial Corp. (WBS), First Commonwealth Financial Co. (FCF), and National Penn Bancshares Inc. (NPBC).
Write to Liz Enochs.