Earnings Preview: End of an Era

Mortgage Revenue Drop

The refinancing boom that has sustained bank profits in recent years appears to be coming to an end. With interest rates on the rise, origination volume is shrinking and margins on loans packaged for sale are thinning - a combination that is likely to crimp noninterest income over the next few quarters, according to Sandler O'Neill & Partners. The good news: home construction is starting to pick up, which could lead to a surge in home purchases.

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Commercial Loan Demand Tepid

Many banks are expected to report increased loans balances. However, in most instances the gains will result from winning business away from rivals rather than from a sudden increase in overall demand. Credit-line utilization rates will remain low and loan originations will be offset by the steady pace of pay-downs, according to Sandler O'Neill.

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Deposit Growth Slowing

All banks have seen a surge in deposits in recent years, but there's evidence that the growth is starting to slow as consumers and businesses that have been stockpiling cash look for better returns. Total deposits are on pace to increase by just 2.2% in the second quarter, down from 4.6% in the first quarter and 6% in last year's second quarter, according to a research note from Oppenheimer analyst Terry McEvoy, citing Federal Reserve data.

Related Article: Big Business Cuts its Cash Hoard a Bit

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Auto Lending Revs Up

Car loan balances at U.S. commercial banks rose for the ninth consecutive quarter in the three months through March 31 and are expected to continue to rise in the second quarter, according to a recent report from SNL Financial. Auto sales in June were expected to hit an annual pace of 15.7 million vehicles, the highest monthly total since December 2007, according to a data from J.D. Power and LMC Automotive. Americans' aversion to driving clunkers is one big reason for the increased demand; the average age of cars and trucks on the road is currently an elderly 11 years.

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Cost-Cutting Continues

Expanding top-line revenue is arguably the industry's biggest challenge these days, and until that changes banks will continue to look for ways to cut overhead. Bank of America announced in recent days plans to eliminate 400 jobs in its mortgage servicing unit, and BBVA Compass said it is closing 21 branches. Expect more news on staff cuts and branch consolidations in second-quarter earnings calls and news releases.

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Capital Ratios Rising

Even with banks returning more capital to shareholders these days than in recent quarters, Sandler O'Neill analysts said in a note to clients that "we expect capital ratios to continue buildinggiven the lack of loan demand, unattractive balance sheet leverage opportunities and the anticipated increase in regulatory capital requirements." Also, the banking industry remains ripe for consolidation and many banks are hoarding capital so they can quickly pounce if the right deal comes along.

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Loss Reserve Releases Near the End

Credit quality improvement have been a consistent theme over the last several quarters, and that the trend is expected to continue in the Q2 as banks continue to make significant strides in shedding problem loans. Still, falling loan-loss provisions can only prop up earnings for so long, notes FDIC Chairman Martin Gruenberg. "We have seen over the last three years a process of improving credit quality for the industry as a whole, and that's allowed for a reduction in [loss] reserves and that's helped drive the net income improvements that we've seen," Gruenberg said in late May. "Our sense is that process has largely played itself out."

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