Are Bank Investors About to Be Disappointed?

Last year was an excellent one for the U.S. banking industry, as they collectively raked in profits of more than $141 billion, a close second to the pre-crisis total of $145 billion. For some of the biggest banks, such as Wells Fargo (NYSE: WFC  ) and JPMorgan Chase, (NYSE: JPM  ) mortgage writing had much to do with that increased income.

If investors are looking to see more of the same as banks begin reporting first-quarter earnings later this week, however, some analysts are predicting sober news: The mortgage party might just be over.

Et tu, Wells Fargo?
It's hard to believe that mortgage maven Wells Fargo could suffer from mortgage-origination malaise, but some experts are warning of a waning in even that mortgage giant's pipeline. JPMorgan analyst Vivek Juneja notes, however, that the slowdown won't be as damaging to Wells, despite the decline in its home refinancing business.

The reasons? Junega sees Wells' putback expenses diminishing, and mortgage servicing revenues increasing. This puts Wells in a much better position than Bank of America (NYSE: BAC  ) , which has not only fumbled the ball in the mortgage origination game, but has been drastically reducing its stable of mortgage servicing rights.

B of A, Citi seen as works-in-progress
As for Citigroup (NYSE: C  ) , which also sat out the mortgage mini-boom, the megabank is regarded as still reinventing itself, much the same as B of A. Obviously, the mortgage slowdown won't affect these banks too much, but there's also not much going on except cost-cutting, so don't expect a lot of excitement in the first earnings report of the year.

One piece of good news regarding mortgages does affect Bank of America, however. The bank has seen a reduction in its troubled loan servicing workload and has been able to cut staff and shutter offices as the decline continues, helping to pad the bottom line by cutting expenses.

A big deal? Probably not
For Wells, investors have been forewarned by CFO Tim Sloan that first-quarter revenues from mortgage activity would probably decline. The bank has been aware of the fact that the refinancing boom may be petering out, and it has taken steps to replace lost revenue with portfolio lending -- making loans that stay on the bank's own books.

Concentrating on this type of lending will be aided by the enormous branch network Wells acquired with its takeover of Wachovia in 2008, as well as the lack of other, similarly ambitious lenders. This combination has helped the bank dominate the markets of big cities like Manhattan and San Francisco. So, even if the mortgage earnings a little off in the beginning, Wells looks poised to more than make up for it as the year progresses -- which is good news for investors.

Wells Fargo's dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever, but with its stock trading at a premium to the rest of the industry, is there still room to buy, or is it time to cash in your gains? To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.


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