Banks are benefitting from a surge in second-quarter loan growth driven almost exclusively by a jump in home mortgage lending.

Lending by the 25 largest banks for single-family loans has exploded so far this quarter, rising $11.2 billion, or at an annualized pace of 56%, to a non-seasonally adjusted basis of $4 trillion for the week ended May 9, according to recent data published by the Federal Reserve.

Brian Klock, an analyst at Keefe, Bruyette & Woods, called the week-over-week number "huge," but cautioned that the Fed data does not include price competition for loans, which could impact profit margins.

"It's a solid leading indicator for mortgage revenue at the largest banks," says Klock. "The increase in volumes has coincided with a drop in interest rates, so it would stand to reason there is more refinancing volume than purchase volume."

Commercial and industrial loans accounted for 62% of total loan growth by the largest banks so far in the second quarter, with home mortgage lending at just under 40%, the Fed data shows.

The single-family mortgage growth was partially offset by a $2 billion drop in consumer loans, which was due almost entirely to a drop in credit card balances, Klock says.

Solid loan growth could stabilize net interest margins in the second quarter, Klock says.

"There's still going to be pressure on bank margins because of the low interest rate environment but this dynamic could help mitigate some of that, because they can remix out of zero-yielding cash to higher yielding loans and reduce the cost of borrowing," he says.

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