-
The Greek debt crisis and China's stock-market crash may put downward pressure on interest rates and delay the Fed's interest rate hike, and they are adding uncertainty at a time when lenders thought recovery would be taking hold.
July 7 -
U.S. banks rebounded in the first quarter as earnings rose 6.9% from a year earlier, to $39.8 billion, and nearly two-thirds of institutions reported higher profits from a year earlier, the Federal Deposit Insurance Corp. said Wednesday.
May 27 -
Bank of America reported its best quarterly profit in more than a year, but with revenue declining and expense-reduction slowing, it is unclear where the company can turn to boost earnings. Similar questions are plaguing many banks as the latest earnings season unfolds.
April 15 -
Citigroup faced many of the same earnings headwinds as other large banks lower revenue and lending but still surprised observers with a strong first quarter Thursday. Its North American consumer business was a big reason why.
April 16 -
JPMorgan Chase reported strong loan growth and higher utilization in its commercial banking unit, which serves midsize businesses. It could set the stage for others to report similar results. Still, low interest rates are muffling the benefits.
April 14
Keep your eyes peeled for commercial real estate and mortgage lending totals when banks' second-quarter earnings reports start rolling in Tuesday.
Expectations are for a so-so quarter as banks remain under revenue pressure because of a slow-growth U.S. economy and tight margins. Meanwhile, the plethora of international crises and fresh uncertainty about U.S. monetary policy are providing new distractions.
If banks, especially big banks, are going to get an unexpected jolt from anywhere, CRE and mortgage lending are the leading candidates.
But delivering an upside surprise will be hard, despite continuing strong credit quality, said Chris Mutascio of Keefe, Bruyette & Woods.
"Balance sheets may never have been better than they are now, but banks are still fighting a relatively lackluster revenue environment," he said.
The silver lining is that slack earnings might barely matter for bank stocks most investors are looking right past the second quarter and valuing based on the rate rise predicted for later this year or early next year. Stock prices surged in the second quarter, with the KBW Nasdaq Bank Index up more than 7%, while the S&P 500 was flat.
But as everybody waits for the Federal Reserve to offer some interest rate relief, a few factors could make second-quarter results better than the forecasts. Below are what observers see as the most plausible scenarios for a surprisingly good quarter.
The Mortgage Factor
Strong mortgage origination and refinancing volume is the most likely path to beating expectations, Mutascio said.
Treasury bond yields have risen in the past month, as the debt standoff in Greece and the Chinese stock-market crash have made investors flee to safety. Mortgage rates tend to follow the 10-year Treasuries, and higher yields will not be good for mortgage demand.
But timing is everything in tallying quarterly results. Home loans can take months to close, and the 10-year Treasury rate was very low earlier this year, generally from mid-1% to low 2%. (The rate stood at 2.50% on Friday.) Some of the refis and home sales inked earlier in the year, when bond yields were lower, should show up in second-quarter results.
"The combination of some residual impact of refinance spilling into second quarter and seasonably strong mortgage originations is one area that could possibly be better in the second quarter," Mutascio said.
FBR Capital Markets, too, sees "seasonal strength in purchase relative to the first quarter of the year," which could push lenders to a strong second quarter, analyst Paul Miller wrote in a note Friday.
The spring numbers do not point to a residential-lending boom, but data for June, generally the beginning of the big season for home sales, is not yet in. Residential real estate loans contracted by 0.4% in April, compared with a year earlier, and grew just 0.5% in May, according to Federal Reserve data for all commercial banks. Those figures followed growth rates of 4.2% in March and 2.4% in February.
A strong summer for home sales could quickly reverse the trend, which would be a boon to mortgage-heavy banks like Wells Fargo, SunTrust Banks and Fifth Third Bancorp.
CRE Boom
Banks' better source of hope for a blowout quarter is commercial real-estate lending, according to Gerard Cassidy, analyst at RBC Capital Markets.
"Commercial lending in general has been strong, and commercial real estate lending has really picked up in the last six months or so," he said. All banks' CRE portfolios grew by 7% in the first quarter from a year earlier, according to the Federal Deposit Insurance Corp.
The pace of growth may be increasing. Among banks with assets of $50 billion or more, the financial-analytics firm Trepp LLC forecasts CRE loan growth of 7.1% in the second quarter, compared with 6.4% in the first. Growth has been especially strong in multifamily.
The volume of CRE mortgages "has picked up and is pretty much on par for the volume before the credit crisis," Trepp managing director Matt Anderson wrote in an email. However, the market appears less frothy than it was then, he said.
Trepp estimated banks will originate $288.3 billion in CRE loans in 2015, more than the previous peak of $275.3 billion set in 2006. Banks have been winning CRE market share away from insurance companies and other nonbank lenders, and are projected to originate 47% of all CRE loans in 2015, their highest share in six years, according to Trepp.
Skeptics of the CRE boom, however, point out that tightening margins are beginning to discourage some banks.
"Some banks are saying that the pricing and terms of CRE loans just aren't meeting their hurdles anymore," Mutascio said.
The CRE loan margin for large banks was 3.42% at the end of the first quarter, down 19 basis points from a year earlier, according to Trepp. But it is still a decent return in a time of low loan yields. How much further it tightens could determine if banks can ride CRE to stronger earnings.
Volatility Pays ... for Some
Trading revenue may be the hardest part of earnings for analysts to forecast, and signals were mixed in the second quarter.
The crises in Greece and China have added to market volatility lately, which is usually a good thing for the biggest banks' trading desks. Choppy markets encourage customers to shift portfolio positions and hedge against risk, giving the banks some fee income in the process.
"The really large banks could absolutely have a good quarter if they knock the ball out in capital markets," Cassidy said.
However, it is very hard to predict trading results before banks report, and "it's our view that capital markets will be under some pressure" in coming earnings releases, he said.
And banks themselves have not been sending optimistic signals. KBW lowered its expectations for trading a little bit based on a few large banks' trading forecasts earlier in the quarter, it said last month.
But the Greek- and China-related volatility has been more recent, and it is still possible that banks' trading desks finished the quarter strong.
Still More Fat to Cut?
The largest banks' cost-cutting programs have mostly run their course, but analysts are hopeful that they can keep pushing down costs further.
And there is always the chance a bank will make a surprise announcement of bold new cuts.
"If you want to get a home run out of this quarter, have someone come on the quarterly call and say they're cutting 25% of branches," said Cassidy.
Bank of America has
After years of slashing costs, banks may still be able cut their way to a second-quarter surprise, observers say. JPMorgan Chase, also, has recently entered the cost-cutting fray, and
"A lot of the cost-save stories have run their course, but there is a fair amount of optimism that they can continue to push expenses down," Mutascio said.
