The overarching theme of the banking industry's reported second-quarter earnings so far is impressive mortgage banking revenues and modest loan growth, according to analysts at FBR Capital Markets.
They say a sustained low rate environment, government mortgage programs and constrained market capacity will make mortgage banking a dominant earnings driver through the end of 2012.
“That said, going forward we expect net interest margins to deteriorate and loan growth to taper off as rates remain low and economic activity is slowing,” the analysts add. “We believe that banks with room to further reduce funding costs or those that boast strong mortgage banking platforms are the best positioned to weather current trends.”
Similar to the first quarter, mortgage banking proved to be a tailwind to headline earnings. Robust refinancing driven by low rates and the expanded Home Affordable Refinance Program and higher purchase volumes are boosting production volumes over the first quarter’s already impressive levels.
According to the Mortgage Bankers Association, mortgage banking activity in the second quarter rose 28% over the prior quarter. FBR’s industry contacts indicated to the firm that mortgage pipelines remain strong as capacity is constrained since many of the larger players stepped back from the market and gain-on-sale margins are holding steady.
The 30-year fixed mortgage rate continues to fall, which should support origination and refinancing activity through the rest of the year. Mortgage originations at the big-four banks increased 37% in the second quarter from last year because of HARP 2.0.
Outside of real estate, Joseph LaVorgna, the chief U.S. economist for Deutsche Bank (DB) said in a note to clients that loan growth is up 9% in the last year, a rate only eclipsed during 2006 and 2007 which was the height of the credit boom. But this figure is excluding real estate (see chart below).
Larger player stats
“Banks with large mortgage banking platforms such as Wells Fargo (WFC), Fifth Third (FITB), U.S. Bank (USB), PNC Financial (PNC), JPMorgan Chase (JPM), and PHH (PHH) should be the main beneficiaries (of the record low mortgage rates),” FBR analysts say.
Wells Fargo continues its domination. The San Francisco bank wrote $131.9 billion in new loans during the quarter, more than double originations from the same period last year. Wells said 16% of those new loans came through the Home Affordable Refinancing Program.
JPMorgan Chase reported higher profits from its mortgage business due mostly to a major government refinancing program and slower repurchases. The bank reported $604 million in profits from mortgage origination and servicing during the second quarter, compared to a $649 million loss in the year-ago period.
And U.S. Bank reported a profit of $1.42 billion for the second quarter, or 71 cents a share, beating analysts’ estimates of 69 cents. About $67 billion of new lending activity contributed to second quarter gains, including $36.7 billion of new and renewed commercial and commercial real estate commitments and $28.1 billion of mortgage and other retail loan originations.
Smaller player stats
Despite loan portfolio increases at the top of the banking pyramid, smaller regional players were able to pick up market share in the second quarter.
On an earnings conference call, Mark Thompson, chief executive of private banking at Boston Private, praised his bank’s 6% growth in its residential mortgage book. The bank saw a residential loan growth of 9% in the Pacific Northwest, 22% in Southern California and 17% San Francisco Bay. Boston Private benefited from residential growth in New England as well in the second quarter but was offset by prepayments.
Average loan growth in the second quarter at Buffalo, N.Y.-based M&T Bank was strong, growing $1.3 billion, or 9% annualized, $61.8 billion. On that same basis, commercial real estate loans grew by $178 million or an annualized 3%, while residential real estate loans were up by $930 million, “reflecting our program of retaining the bulk of our conforming mortgage loan originations to hold on our balance sheet, said M&T Bank Chief Financial Officer Rene Jones on a recent call.
Remainder of season
Analysts at FBR note that commercial & industrial loans and residential mortgages are the only loan buckets most banks are growing.
Commentary on conference calls and conversations with management teams suggest to analysts that while growth was impressive in the quarter, it is not likely to last, as banks experienced a material decline in customer activity over the last month.
“The ongoing financial crisis in Europe as well as media attention surrounding the impending fiscal cliff have caused businesses and consumers to rein in their use of credit,” analysts said. “We recommend investors not lend too much credence to the levels of loan growth experienced this quarter, as we expect that growth has significantly slowed less than a month into the third quarter.”