Banks’ Quarterly Earnings Expected to Disappoint

Bank stocks were reportedly up in Q4 2013, but with the mortgage market looking the way it is, one investment firm doubts most banks will be able to meet the hype.

According to a market report from FBR Capital Markets, bank stocks managed to outperform compared to many others, with the KBW Bank Index seeing a 10.3 percent gain last quarter versus the S&P 500’s 9.0 percent. FBRsays the improvement stemmed from rising investor expectations in response to interest rates moving higher and the economy showing signs of improvement.

“However,” FBR says, “we believe most banks will not be able to live up to these expectations as loan growth remains weak, pressures on margins still exist, and mortgage banking results should remain relatively poor.”

Based on secondary market movements, FBR estimates last quarter’s originations came to $302 billion, down nearly 50 percent year-over-year and 34 percent quarter-over-quarter. For 2014, the firm says it is lowering its full-year estimates from $1.4 trillion to $1.3 trillion.

The silver lining in FBR’s view is banks’ continued emphasis on cost-cutting, which should help to offset lower growth. Improvements in asset quality will also provide a tailwind through reserve releases (a booster for many banks in recent quarters), though FBR says the benefit should be minor.

Not included in the firm’s prediction is the impact Mel Watt could have as the new director of the Federal Housing Finance Agency. In his first official act, Watt suspended an earlier directive for the GSEs to hike guarantee fees, citing concerns about the effect on credit accessibility.

“If this trend continues and he is successful in opening up the credit box, it should provide a tailwind to 2014 mortgage production,” FBR notes.

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