Second quarter bank and thrift earnings could see "some pressure" as a result of "relatively weak" revenues from their mortgage banking businesses, a report from FBR Capital Markets warns.
Still, the report notes that mortgage banking revenues for the group were up 5% over the first quarter, as there was some improvement in refinance business from first quarter lows and purchase origination volumes picked up slightly.
The analysts who wrote the report—Paul Miller, Scott Valentin, Steve Stelmach, Bob Ramsey and Ram Shankar—predict a 30% to 40% increase in gain on sale margins as interest rates declined during the second quarter.
The banks the analysts favor for investors are those "large banks with diversified revenue sources, efficient operations, large reserves, and relatively less exposure to mortgage banking." Specifically, they mention PNC, JPMorgan Chase and U.S. Bancorp.
They are cautious on Bank of America, in part because of repurchase issues, and on First Horizon, which has a large pipeline of reps and warranties claims.
The report also mentioned a cut in estimates for PHH Corp. FBR lowered its operating earnings estimate from $0.55 to $0.35 per share to take into account lower mortgage banking activity driving down lower mortgage originations.
It cut its estimate on PHH's GAAP EPS from $0.49 to a loss of $1.00 due to a writedown in the company’s mortgage servicing rights as a result of lower mortgage rates in the quarter. The reduced 2011 estimate of $1.65 and 2012 estimate of $3.10 for PHH "reflect lower mortgage originations for the industry," FBR Capital Markets said.
In general, the analysts noted they "believe loan growth will remain relatively flat until we get a meaningful economic recovery and we work through massive amounts of real estate owned. While this quarter was stronger than the last several quarters, we highlight that unless there is a dramatic improvement in the economy, we don’t expect to see meaningful loan growth (5%–10%)."
While mortgage banking activity increased by 5% over the first quarter, the analysts felt it was disappointing since in the past the second quarter is one of the strongest for home purchases, and rates were near historic lows in the most recent period.
"This quarter may mark the beginning of a 'new normal' for mortgage market activity seeing that anyone who had the means to refinance took advantage of low rates in the third quarter of 2010. We also expect the glut of REO inventory will likely keep mortgage banking activity weak through 2011 as cash transactions remain a large portion of home sales. On the bright side, mortgage banking revenue could be relatively resilient, as the four largest players now control more than 50% of the market and gain on sale margins have been favorable," the analysts said.
The companies most likely to be affected, they said, are: New York Community, Wells Fargo, Bank of America, Fifth Third Bancorp and First Horizon.
