Finding the Silver Lining for Banks

The recent rise in mortgage interest rates has taken a cut from the mortgage banking lines of three of the largest banks, but the news was not all negative.

Overall, Bank of America, JPMorgan Chase, and Wells Fargo posted solid financial results for Q4 in their earnings statements published last week, though Wells Fargo’s net income was down by $1 billion over-the-year for the full year of 2016.

As Kroll Bond Ratings Agency (KBRA) noted in a new analysis, the rise in mortgage rates over the last two months and the Fed’s December rate hike resulted in a sequential decline in the mortgage banking lines for all three.

The value of the mortgage portfolios at all three banks, however, increased. For example, the asset value of Wells Fargo’s MSRs were marked up by 24 percent, up to a value of $12.959 billion, according to that bank’s earnings statement.

Still, KBRA Senior Managing Director Chris Whalen noted, “lower gain on sale margins and rapidly shrinking pipelines for Q1 production were common features for all three top U.S. banks and are also in evidence at smaller institutions.”

Whalen pointed out that the increased interest rates are unlikely to change banks’ fundamentals. However . . .

“Gains in terms of net interest margin will be small and volatile quarter-to-quarter as the cost of funds for market sensitive money center banks also rise,” Whalen said. “Indeed, financials may suffer in the near term due to the negative impact of rising Treasury yields on the housing sector. As 2017 progresses, we expect that falling lending volumes for residential and commercial real estate will be a continued drag on volumes and earnings for financials.”

Citigroup’s Q4 earnings report will be released on Wednesday, January 18.

Click here to view the complete KBRA report.