Q4 2012 Bank Earnings Outlook -- Lower Mortgage Volumes Suggest Anything?

rcwhalen's picture

I am scheduled to be on Bloomberg TV with Tom Keene and Sara Eisen from 7-8 AM ET today <http://www.bloomberg.com/video/whalen-investors-not-willing-to-take-mort...> -- Chris

It’s time for Q4 2012 bank earnings and, once again, the message from the TBTF banks will be that all is well – although not as well as one might hope.  As I noted in the Institutional Risk Analyst comment this week, “Bank Outlook 2013: Lower Mortgage Volumes, Higher Interest Rates,” the refinance boom is over.  The question now is whether the banks will shift gears and start supporting more sales of new and existing homes.

Looking at street projections for 2013 and 2014, the assumption is a steady rise in new home construction and sales.  Unless you believe that the major banks are going to shift gears and start writing a lot of non-conforming loans, it is hard to see how these high volumes will be funded.  Wells Fargo (WFC), for example, in its latest housing report by Brian Ye, Nicholas Maciunas and Jonathan Smith, sees existing home sales rising 200,000 per year to 5 million units, with new home starts likewise headed north towards 1.1 million. 

Yet as we noted in The IRA this week, the refinance boom is over and banks are facing shrinking margins.  Cost cutting, falling credit costs and non-interest income are the likely sources of earnings expansion in 2013.  Big revenue? Not so much.  And, if you believe the script, median home prices will be rising 5% per year – even as the unemployment rate still hovers above 7.5%.   It is interesting to note in the WFC report that most of the revisions in the housing data cited above have been down in the subsequent months.

In the most recent issue of Housing Wire, I took a look at Tuscon, Scarsdale and Sarasota, the last market home of many of our friends in the financial world like David Kotok at Cumberland Advisors.  In “Is the U.S. housing market really on the mend?,” I looked at some of the data series available from Zillow to see what it tells us about these very different markets.  All show a bounce off the bottom, about 20% or so.  

Volumes are light, however, and the range between high and low prices in some markets suggests a still brisk flow of involuntary sales.  While AZ and FL are in price ranges that are easily financed, the median prices in the NY market is $500,000 above the GSE cap of $625,000.  So in Scarsdale NY, we are talking about 50 LTV loans to sell the average house? Prices in many close-in markets in the New York tri state area are still too high to make rental investments work.  Hello.

With WFC, the 2013 consensus of Sell Side analysts is for down 1.2% but with higher earnings, of course.  This compares to up almost 6% after a banner year of refinancing activity, much of it guaranteed by Uncle Sam.  The GOP can say what they want about the FHA, but the fact is that banks have jumped on refinancing for every borrower in portfolio that would or could respond.  

Does the MBA prediction of a down year in 2013 loan volumes suggest anything about the forward volumes for new real estate loans?  Do we really expect the TBTF banks to start taking first loss risk on residential 80/20 mortgages that have 100% risk weights under Basel III?  The risk weight of that same loan with an FHA wrapper is 0%, yes?  

The folks at JPMorgan (JPM) are feeling better in the wake of the London Whale fiasco, with the Sell Side estimating an up revenue year in 2013 after two down years in 2012 and 2011.  Of course EPS will rise to $5.30 in order to keep the stock price well supported.  But up 1.6% on revenue in 2013 is nothing to get so excited by, perhaps one reason that CEO Jamie Dimon now agrees with me that the US should pull out of Basel III.  Dimon even calls Basel III “un-American” and he is so right.  The US should pull out of the Basel III framework now.  Jamie Dimon for Treasury Secretary.  

Basel III demonizes real estate lending, a trend that is good for companies like my employer Carrington and the other non-bank lenders and special servicers.  Whether you talk about new loan originations or mortgage servicing rights, the Basel III framework is hostile.  But nothing the regulators can do via Basel III is nearly as significant as the still ignored issues of securities fraud and liquidity risk.  

The problem with the banks was not that they did not possess sufficient liquid assets, but rather that their clients puked first private label, then agency paper back into their faces.  Think of the famous “fire hose” scene from my bachelor party oh those many years ago.  Liquidity drove the crisis in 2007 and 2008, not capital.  In 2008, no collateral had any value, so the whole question regarding capital raised by Basel III is obviously beside the point.  For a few fun weeks and months, we were all broke.  Until the regulators and prosecutors deal with the root of that event, namely securities fraud, we accomplish nothing. 

The next most robust profile for the large banks is Bank of America (BAC), which is estimated to raise revenue a whopping 3% in 2013.  After an estimated drop of over 12% this quarter, down $3 billion YOY, BAC is expected to have the second largest revenue growth rate of the group.  This view is particularly interesting given that the bank continues to shed mortgage servicing and other operations. 

EPS is expected to double to almost a dollar, so can the stock possibly not rise by the same magnitude?  Given that some three dozen Sell Side analysts now follow BAC, can the stock help but rise into the $20s?  

The settlement of legacy claims with FNMA was certainly a welcome development, but more work still lies ahead on investor claims.  Keep your eye on the successor liability motion in the litigation with MBIA (MBI), a decision that could affect all of the other claims.   

But the real emphasis among Sell Side analysts is Citigroup (C), which is expected to grow revenue some 12% in 2013 after seeing volumes fall almost that much in 2012.  C has the lowest dividend in the group and still trades on a beta of 1.88 or 2x its asset peers.  With Michael O’Neil driving change from the board room, C has the potential to deliver the greatest value to the risk oriented investor.  With C still trading well below book, good news on the earnings front may well drive this stock higher on the shoulders of the thundering herd – of sheep. 

One of the key assumptions in the rosy scenario on financials, keep in mind, is that credit costs are trending lower – and will continue to do so. Yet we’d be remiss not to notice that delinquency rates in FNM 6s and 5s are rising now for several months. It is also interesting to note that there is a group of US banks, mostly smaller institutions, which are actually getting worse instead of showing improvement in terms of credit performance.

Hmmm.  What could this mean?  Think of that mortgage still sitting in a 6 or 5 coupon after the past several years of frantic refinancing activity.  Could this be the long awaited not-refinanced loan default wave appearing on the horizon?

My take on 2013 is that we should be careful on the downside for the revenue growth rates of the largest banks.  The kind of growth rates predicted for banks and housing, for example, two highly correlated sectors in years gone by, seem a tad rich.  If the large TBTF banks are really being forced  out of the mortgage business, then just how will we achieve these revenue growth rates?  How indeed.  Good hunting.  

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Zer0head's picture

Saw you this AM on the Tom & Sara show. BAC $25 did I hear you right? More importantly what's all the dirt from behind the scenes there at BBG TV - Where's Ken Prewitt? Is Sara starting to date again or is she still getting over Mike? Is the studio big enough for Keene's ego? Do the others know that "mathematical genius" schtick is all BS? 

It was nice of you to plug Zero Hedge but how come Keene didn't reinforce that, perhaps he has a pact with Business Insider since Joe Weisenthal is now a regular. How do you feel about sitting in a chair that Joe soiled the day before? 

SmoothCoolSmoke's picture

Right, the TBTF banks accounting departments are finally gonna run out of ways to cook the books and post winning earnings.  Uh-huh. 


LawsofPhysics's picture

What utter garbarge.  With "mark to fantasy" accounting in full swing and complete regulatory capture  of washington and all western governments, the banks can appear as "solvent" or "profittable" as they want.

No one has gone to jail and fraud remains the status quo, hence, things continue to deteriorate in the real economy until the suppy lines break and the world either 1) addresses the moral hazard or 2) errupts in war.  History is pretty clear on on well humans are at having adult conversations.  Hedge accordingly.

disabledvet's picture

First off great job on the show this morning. I was riveted to the screen. Second you're missing a SLIGHT change in the Big Banks composition namely they all own massive secuties businesses now. Obviously with the Dow hitting one record low after another and capital markets permanently impaired due to 2008 there is no hope that this "inside the beltway" info could in any way be a driver of earnings...especially since we now know that trillions in settlement costs vis a vis the mortgage meltdown are a given. Not only that but I hear the left is OUTRAGED over the excessive compensation paid to Corporate Chieftans with particular emphasis on Wall Street traders who keep manipulating prices higher in spite of overwhelming evidence that we have supply gluts popping up everywhere. Anywho I'm sure our ever present media watchdogs ever mindful of the public interest expressed their solidarity with your quest to have "the truth be told" on matters such as these and wish you all the best...Mr. Right (again) and look forward to your next post announcing your appearance on "some show going on somewhere."

FreeNewEnergy's picture

.gob shutdown in Feb or March changes all outlooks to negative.

Try that for good hunting.

Northeaster's picture

"unemployment rate still hovers above 7.5%"

This is only true when you don't count an entire demographic of our population, I'm not sure why you do not point this out.

"I looked at some of the data series available from Zillow to see what it tells us about these very different markets."

How accurate is Zillow? I have read in various parts they are now shilling for the industry. However, I will disclose I'm not sure one way or the other, EVERYTHING is subject to question nowadays.

"The next most robust profile for the large banks is Bank of America (BAC)"

Like most TBTF's, they do not have to face the music. Sure, some divisions may be fine, but they, and every other TBTF are a protected class by our own government that should otherwise be broken into pieces and sold off.

"Citigroup (C), which is expected to grow revenue some 12% in 2013"

When you own CONgress for over a decade, how can you not do well. While at the same time, still have an outstanding balance against The Treasury (Taxpayers).

"Good hunting."

Is that meant in terms of the future, where TBTF bankers and CONgress Members are the prey? I think more People are more concerned about surviving while these criminals pillage us.

MFLTucson's picture

How accurate is Zillow?  

Answer: As accurate as the banks balance sheets!

MFLTucson's picture



The Great American Con Game post another quarter of deception for all the Wall Street whores to further fuel the insane game of a "recovery"! The American sheep are being taken to slaughter happy, fat and complacent!

We need gun control, not to be shielded by the biggest crime ring in history running the banking system, says Bloomberg big mouth/know it all joined by the lapdog media and his fellow clowns Cuomo, Feinstein, and the rest of the liberal liars looking for their day in the sun. They want to disarm this country as quick as possible so they capitalize on a mass murder of children by a drugged lunatic, in hopes that when this Ponzi dollar/banking show bursts, they will kill and control you at will like is done in other 3rd world countries like Mexico, Venezuela and Cuba. They will keep the unemployment coming and all the food stamps you want so long as you agree to be disarmed and unable to defend yourself while the bankers steal what is left on the bones of the carcass they have already stripped (libor, Corizine, Madoff, Lehman, AIG, et al), a once great nation ruined by the Jewish banking cartel. Folks, this is not America, WAKE THE HELL UP!


LawsofPhysics's picture

Correct.  See my post above.  In the absence of restoring the rule of laws and contracts, nothing changes until the supply lines for essential goods and services breaks.  same as it ever was.