Investors should brace for third-quarter earnings shock as banks' loan growth stalls and mortgage-banking revenue dries up even faster than predicted, according to an analyst report from BMO Capital Markets.
BMO lowered its quarterly earnings forecasts for five banks after their management indicated at recent conferences that loan demand is softening, according to the report, which was released Wednesday. The analysts decreased their third-quarter loan-growth forecast for most regional banks to 3.7% from 4.7%, compared to the third quarter of 2012.
The five banks whose earnings-per-share forecast BMO reduced were Wells Fargo (WFC), BOK Financial (BOKF), Fifth Third (FITB), PNC Financial Services Group (PNC) and SunTrust Banks (STI). The estimates for BOK Financial and SunTrust were reduced by 2 cents; all other estimated were reduced by 1 cent.
Additionally, last week the BMO analysts lowered their third-quarter estimates for M&T Bank (MTB) and Comerica (CMA).
The slowdown in mortgage-banking revenue has been even more dramatic, and has outpaced the analysts' expectations. As a result, the BMO analysts now say they expect in mortgage revenue to decline by 60% this quarter compared to the third quarter of 2012. Previously they had estimated that revenue would fall by 31% year over year.
The analysts made the change after several banks indicated in investor presentations that their mortgage revenue was dropping faster than they had expected, due primarily to rising interest rates. Overall, refinance applications have dipped 48% from the same period in 2012, while purchase applications have declined by 10%, the analyst report says.
On the positive side, the housing recovery has been stronger than the analysts expected, which has improved banks' credit quality, the analysts said. They expect lower third-quarter chargeoffs and loan-loss reserves, which should ease the sting of revenue declines, they said.
The BMO analysts maintained their earnings forecasts for BB&T (BBT), KeyCorp (KEY) and Regions Financial (RF), while slightly adjusting their forecast for Zions Bancorp. (ZION), all of which affirmed that their loan growth is in line with previous forecasts.