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Mortgage lending activity was weaker than expected in the first quarter and the result is likely to be slimmer profit margins for a number of banks, according to Paul Miller, a managing director at FBR Capital Markets.
April 5
Bank of America (BAC) suffered sharp declines in mortgage banking income and overall consumer lending in the first quarter, raising
The Charlotte, N.C., bank's weak results in consumer banking, mortgages, and currency and commodities trading overshadowed strong investment banking fees, commercial lending growth, and an impressive drop in expenses. Total adjusted revenue dropped 8.4% drop to $23.8 billion. Profits of $2.62 billion, or 20 cents a share, missed the average estimate of analysts polled by Thomson Reuters by two cents.
"They're earning money, and that's a positive, but the big question is can they continue to have flat revenue in the face of declining expenses?" says Paul Miller, a managing director at FBR Capital Markets. "I don't think B of A can earn their cost of capital."
On a conference call Wednesday, Mike Mayo, a bank analyst at CLSA, asked Bank of America CEO Brian Moynihan whether he was leading a revenue push at the company to compensate for the weaker-than-expected results.
Moynihan replied that his priorities remain "to continue to push the legacy issues and costs out of the company and at the same time take the company and drive the underlying business metrics. … And as we clean up more of the former, then the focus of the company is on the latter."
The clean-up work, which has included building capital and liquidity and resolving mortgage litigation, "is starting to fade away," Moynihan said. "We have 260,000 people in this company, and a lot of them have been focused on this. And it's just their time to shine."
But it will be hard to shine in the mortgage business in the coming quarters given that refinances still make up the lion's share of Bank of America's total originations.
B of A said roughly 91% of the mortgages it funded in the first quarter were refinances, while just 9% were for home purchases — a perilous mix given that most analysts expect the
By comparison, home purchases made up 31% of Wells Fargo's (WFC) home loan volume in the first quarter.
"That means Wells Fargo is grabbing business from B of A on home purchases," says Erik Oja, a bank analyst at S&P Capital IQ. "We need to see the industry transitioning toward the purchase market."
B of A's mortgage banking income fell 22% to $1.3 billion from a year earlier. Overall, consumer and business banking (which includes home equity, credit cards, and direct-to-consumer lending) posted a 4% drop in net income to $1.4 billion compared with a year earlier.
It was "a very negative performance," Oja says.
That was in contrast to commercial and industrial loan growth, up 5% to $280.3 billion in the first quarter.
"It's pretty serious that their consumer businesses are in such decline," Oja says.
B of A's stock was trading about 5% lower at $11.68 a share Wednesday afternoon, during a down day for financial stocks.
B of A on Wednesday also announced a $500 million settlement of several class-action lawsuits related to poor disclosures about mortgage-backed securities issued by Countrywide Financial, which the bank acquired in 2008. The settlement, which needs court approval, would resolve 70% of outstanding and threatened private-label investor claims.
Analysts questioned whether litigants would settle for such a small amount since the outstanding unpaid principal balance of the securities involved exceeded $350 billion.
Another negative: B of A reported a 10% increase to $13.5 billion in outstanding claims by private-label mortgage-backed securities investors. Still, the $500 million settlement could eliminate a significant portion of those claims in the quarters ahead.
"I don't think anyone is going to declare complete victory," Bank of America Chief Financial Officer Bruce Thompson said on the conference call. "But we're moving through the pipeline of [litigation] items in a meaningful way."
Many analysts still believe B of A is under-reserved for the litany of lawsuits facing the industry. Litigation expenses totaled $881 million in the first quarter, down slightly from $916 million in fourth quarter and up from $793 million a year earlier.
Litigation expenses have "largely consumed the core earnings power of the company and could continue to do so," Miller says.
For several quarters, it has become almost a ritual for B of A to announce a major
Moynihan said the bank is cutting costs at a pace of $900 million a quarter, and he expects that rate will reach $1.5 billion in expense reductions by the fourth quarter. Expenses fell 5% in the first quarter from a year earlier to $18.2 billion.
The bank also has made huge strides in raising its estimated Basel III Tier 1 capital ratio to 9.42%, up from 9.25% in the fourth quarter.
