Mortgage Mania Makes These Banks Look Lucrative

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With the new earnings season upon us, one sector to really keep an eye on for opportunity will be the financial sector. Banks are reporting good profits and will continue for some time to come. Two banks have already reported and more will come very soon. Let’s take a look at some of the banks and what will keep profits coming.

WELLS FARGO

Wells Fargo (NYSE: WFC) had earnings in the third quarter that were considered records because increased fees and trading profits increased revenue for the bank. With more home owners refinancing at record low rates, the bank expanded its mortgage portfolio. Its net income rose 23% and its per share earnings beat analyst estimates by a penny. Overall revenue rose by 8% which was slightly lower than analysts had expected. Core deposits increased by 7% and this allowed the bank to lend more easily. While loans to consumers increased by 4% the bank believes that this latest round of loans will be repaid and for this reason it released $200 million it had set aside for possible loan losses.

JPMORGAN

Making more home loans, JPMorgan (NYSE: JPM) saw profits increase by 34%. Net income was a record $5.71 billion, or $1.40 a share, up from $4.26 billion, or $1.02 a share, a year earlier. Revenue from mortgages was $1.8 billion and this is 36% higher than a year earlier.

U.S. banks in general have been enjoying a surge in demand from homeowners to refinance mortgage loans at lower interest rates.

As rates fall to new lows, mortgage refinancing continues to pick up. The Market Composite Index, a measure of application volume, rose 2.8 percent on a seasonally adjusted basis and 3 percent unadjusted during the week ended September 21. The rate for 30-year fixed-rate mortgages (FRM) with conforming balances of $417,500 or less decreased to 3.63 percent from 3.72 percent with points decreasing to 0.41 from 0.45.  The rate for jumbo 30-year FRM (with balances greater than $417,500) dropped 12 basis points to 3.87 percent with points decreasing to 0.33 from 0.35.

And the good times could continue as the government steps up its support of the broad housing market. Jason Goldberg, a banking analyst at Barclays says:

“We expect mortgage revenue to continue to be elevated in the third quarter and possibly into next year.”

In the third quarter, banks probably originated as much as $450 billion of home loans. The banks play an advantageous role as middlemen in the whole mortgage machine. Banks sell most of the mortgages to investors after they are packaged together in the form of bonds. These bonds become even more attractive to investors because the U.S. government steps in and guarantees the loans. Mortgages packaged as bonds are sold at a profit.

Many analysts believe banks will keep cranking out mortgages and it won’t stop any time soon because rates are so low. It will go on for quarters.

When Citigroup (NYSE: C) comes out with its earnings, it is going to be important to see how it is doing as a whole, aside from mortgage loans. One reason WFC got a negative response from investors was its “net interest margin” dropped 25 basis points in the third quarter. Banks borrow money from depositors and lend it out at higher rates to businesses and consumers. Citigroup's net interest margin has gone from above 3% down to 2.8% last quarter and if it goes down again the stock could have problems.

So there is much more to banking than mortgages. There are credit issues with old loans that may still be on the books. A bad quarter (like Citigroup’s second quarter) could have an adverse affect upon earnings as a whole. Legal expenses could be another issue to watch out for. Many banks have been under assault here because of various world legal issues.

Regardless of some of the challenges the banks may be facing, with the on going QE3 mortgages and refinancing should be abundant through 2013. Since the banks have been so low the revenue increases in some of the larger banks could look lucrative for a number of quarters going forward.


johnmylant has no positions in the stocks mentioned above. The Motley Fool owns shares of Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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