Small banks that report quarterly earnings can find a lone bright spot in Mortgage momentum.
In the past few years changing consumer demands, competition and heightened regulatory scrutiny have made it difficult for community banks to boost their revenues, especially those that are related to noninterest income. Many smaller institutions are today running on mortgages and fees that they collect from selling organizations.
Cyclicality has always been a concern for small banks. A rise in home purchases has resulted in an excellent second quarter for most organizations. The low mortgage rates have kicked off their refinancing activities. This has provided considerable relief to many banks that are mainly into mortgage operations. The bounce in the mortgages is forecasted to continue throughout the year.
In the first quarter this year, many community banks saw a 2% reduction in the fees from loan sales. However, there might be a change in this trend. As per Mortgage Bankers Association, the 10-year Treasury has been down by 29% this year and there has been a 65% increase in refinancing Volume. These could affect mortgage rates in a big way.
Many banks that were done with originating mortgages are getting back into business again. “There is going to be a boost in the revenues of many banks that are mainly into mortgage lending and the cause for this is the low interest rates,” says Merion Capital Group’s director of research, Joe Gladue. “The number of employees in the banking sector is increasing and we should soon achieve full employment. Low interest rates and a healthy economy can truly prove to be an excellent omen when it comes to mortgages.”
Lower rates however do not mean higher returns in many cases.
Wells Fargo, one of the major players in mortgage reported last week that it has seen a 17% fall in its mortgage fee income when compared to the previous year. There has been an increase in companies that are offering mortgage refinancing and Wells Fargo has been losing most of its mortgage-servicing customers to such refinancing companies. The availability of mortgage refinances at lower rates is luring many towards smaller banks that is turning into a gain for them.
In the long run a healthy economy should help in improving the results of smaller institutions. The rise in the oil prices should put banks of all sizes in a better position to originate more loans. KBW has forecasted a 9% yearly growth in loans in the case of community banks. This, it says, will be evident by the end of the second quarter.
“I am sure the earnings of the group would be better this quarter,” says a KBW analyst, Chris McGratty, while talking about smaller banks. “If you have followed what happened to the mortgage rates last month, you will probably agree with me. Loans are growing pretty well and the credit costs still are very benign. That is just the message I would like to give right now.”
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