Please ensure Javascript is enabled for purposes of website accessibility

Are Bank Investors About to Be Disappointed?

By Amanda Alix - Apr 9, 2013 at 10:18AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Some analysts predict weakened mortgage income for the first quarter.

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 (WFC -0.26%) and JPMorgan Chase, 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 (BAC -1.23%), 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 (C 0.93%), 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Citigroup Inc. Stock Quote
Citigroup Inc.
C
$49.78 (0.93%) $0.46
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$34.45 (-1.23%) $0.43
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$42.00 (-0.26%) $0.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
331%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.