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Recent industrys analysis of the credit market is too good to be believed or sustained, which should raise red flags for everyone.
October 26 -
Loan-to-value ratios in commercial real estate lending have returned to their levels from the bubble days, Moody's says. Loss-rates look good for now, but trouble could be coming.
September 11 -
The first stress tests for regional banks show loan losses closely in line with the postcrisis period. However, an independent analysis suggests losses likely would be even higher.
August 4 -
Signs of optimism are growing for acquisition, development and construction loans as banks hone strategies in a market transformed by the crisis.
July 27 -
Regional banks did a much better job of expanding revenue than their megabank counterparts in the third quarter, but they had to spend more to do so and risk angering investors in a tight-margin environment.
October 15
Bankers can blame the lousy third quarter on a decline in fee income, but fixing the problem may not be so easy.
Low revenue from trading and mortgages was among the chief reasons that third-quarter results fell short of expectations, especially for the largest banks. Fee income sagged an average of 2% from the second quarter, according to a Keefe, Bruyette & Woods note based on data from the 128 banks that had reported through Friday.
Bigger banks fared worse, with the money-center banks reporting a 6% drop in fee income on average, the regionals 4% and the small and midsize banks 2%. That trend reflects larger banks' greater dependency on trading and capital-markets revenue, which took a major hit this summer from turmoil in Europe and China.
But banks without big trading businesses suffered fee declines, too, because just about every mortgage-related fee source was down, including originations, sale margins and the value of mortgage servicing rights. Those trends hit just about everybody, from regionals to community banks.
"Overall it was a pretty rough quarter," said Fred Cannon, a KBW analyst. "On the fee side, both trading and mortgage banking came in a lot lower than expected, and that drove a lot of misses."
Still worse, few banks offered hints that the fourth quarter would be much better. The causes of the mortgage slowdown have not gone away, and a few big banks –
Unless the Federal Reserve gives "a clear indication" that it will raise interest rates in December, "it's not shaping up to be a great quarter," Cannon said.
Third-quarter results for the industry as a whole could improve if the community banks, many of which have not yet reported earnings, do well. For the larger banks, however, the quarter was more of the same that they have seen for the past year, if not worse.
The size of the trading slowdown took some by surprise. Bank of America and a few other lenders
Volatility in the markets can be good for trading desks, by spurring clients to shift positions and thus boosting transaction fees, but last quarter it simply caused clients to stay put, said Marty Mosby, an analyst at Vining Sparks. The problem was persistent uncertainty throughout the quarter: in July, the standoff over Greece; in August, China's market swoon; and in September, anxiety over whether the Fed would raise rates.
"There was no clarity on which way things were heading, so people didn't want to make any decisions," Mosby said. "That leads to investment banking deals being pushed back, capital-markets trades coming down, and a drop in market valuations, which hits wealth-management fees."
The third quarter was very bad for fixed income, securitized products and macro trading, and not so bad for foreign-exchange trading, said Justin Fuller, an analyst with Fitch Ratings. But nobody escaped the slump.
"While sometimes volatility can bring clients to the marketplace, this caused clients to disengage," Fuller said.
The causes of the mortgage slowdown have gotten less attention than the markets' near-meltdowns this summer, but they could have a greater long-term effect on earnings. More competition from nonbanks has brought down banks' origination volume and loan-sale margin, while low interest rates have depressed the value of servicing rights. These rights are estimates of future cash flows, which generally increase when rates are higher.
At the country's nine largest mortgage banks, originations fell an average of 12%, according to a KBW note. These companies are Wells Fargo, JPMorgan, Bank of America, U.S. Bancorp, Citigroup, SunTrust, BB&T, PNC and Fifth Third.
These lenders also recorded less profit from selling mortgages they originated. Their gain-on-sale margin tightened by an average of 14 basis points, KBW said.
Still worse, during the third quarter the mortgage market continued its shift toward home purchases and away from refinancings, which have a much higher profit margin than purchases. That shift was expected to happen eventually, but it may have come sooner than some analysts expected.
"Refi activity has gone on longer than anticipated and we expected it to shift to more of a purchase market, but the timing as to when that was going to occur" was not totally clear, said Christopher Wolfe, a Fitch analyst.
Banks that managed to avoid fee erosion in the third quarter had strengths in areas to offset mortgage and trading revenue. Huntington Bancshares, for instance, has relatively small capital markets and wealth management businesses and has instead focused on increasing customer accounts, particularly fee-bearing ones. In the third quarter its account service charges rose 9%, helping it boost its noninterest income 2% from a year earlier.
KeyCorp has also excelled among regionals in generating fees, focusing on improving its corporate banking services to target companies that are being ignored by the money-center banks. KeyCorp raised noninterest income 13% from a year earlier on the strength of a 24% increase in investment banking revenue and a 36% increase in corporate-services revenue.
Strategies like KeyCorp's and Huntington's proved winners in a quarter where big banks' bread-and-butter fee sources came under stress from all sides.
"It was really a confluence of issues that came together at the same time to depress fee income at both the money-center and superregional banks," Mosby said.
