Nomura Securities on U.S. Banks - Mortgage Update: Refi and Gain on Sale
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Rating Summary:
13 Buy, 11 Hold, 0 Sell
Rating Trend:
Down
Today's Overall Ratings:
Up: 11 | Down: 35 | New: 23
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Nomura Securities on U.S. Banks - Mortgage Update: Refi and Gain on Sale
Nomura analyst, Brian Foran said, "4Q average mortgage refinance volumes and gain on sale have been roughly flat with 3Q. That said, both metrics peaked in Aug/Sep and have been slowly trending down, so as we look to 1Q, the mortgage revenue outlook will tail off."
"This would change if rates moved lower. Mortgage rates would need to get to ~3.75% to trigger the next refi wave. This is not that hard to imagine, as we are at 3.90% today, which is 10-20bp lower than where we spent most of the fall. However, there are diminishing returns: for a given level of refi incentive, fewer and fewer borrowers refinance. Thus, the next refi wave would be ~20% smaller than the one that just passed."
"Guidance on 4Q mortgage results is different from different banks. JPMorgan has said mortgage will be lower in 3Q, Fifth Third has indicated flat but that gain on sale spreads are starting to come in, and Wells has said mortgage will be better in 4Q. We think this mostly reflects accounting; JPMorgan books origination revenue at rate lock, so all of the September peak was recognized in 3Q. Fifth Third (Nasdaq: FITB) is partly at rate lock and partly at loan funding, so the upside was split between 3Q and 4Q. Wells books at funding, which pushes the upside to 4Q."
"Looking across the rest of the industry, BofA (NYSE: BAC), BB&T (NYSE: BBT), Citi (NYSE: C), JPMorgan (NYSE: JPM), PNC Financial (NYSE: PNC) and SunTrust (NYSE: STI) all book at rate lock and are past the peak unless we get another move down in rates. FITB and USB book at a combination of rate lock and funding, and thus 4Q will probably be in the same ballpark as 3Q (but 1Q could move lower). Wells Fargo (NYSE: WFC), Huntington Bancorp (Nasdaq: HBAN) and Regions Financial (NYSE: RF) book at funding, and thus 4Q could be better than 3Q, and even 1Q could stay pretty strong."
"The market has consolidated, and the big three lenders now have over 50% share. This argues for gain on sale remaining high. Within the big three lenders, the big story is the market share shift out of BofA and into Wells, especially in correspondent lending. More broadly, regionals such as US Bank (NYSE: USB), Fifth Third and BB&T have picked up share this cycle."
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Nomura analyst, Brian Foran said, "4Q average mortgage refinance volumes and gain on sale have been roughly flat with 3Q. That said, both metrics peaked in Aug/Sep and have been slowly trending down, so as we look to 1Q, the mortgage revenue outlook will tail off."
"This would change if rates moved lower. Mortgage rates would need to get to ~3.75% to trigger the next refi wave. This is not that hard to imagine, as we are at 3.90% today, which is 10-20bp lower than where we spent most of the fall. However, there are diminishing returns: for a given level of refi incentive, fewer and fewer borrowers refinance. Thus, the next refi wave would be ~20% smaller than the one that just passed."
"Guidance on 4Q mortgage results is different from different banks. JPMorgan has said mortgage will be lower in 3Q, Fifth Third has indicated flat but that gain on sale spreads are starting to come in, and Wells has said mortgage will be better in 4Q. We think this mostly reflects accounting; JPMorgan books origination revenue at rate lock, so all of the September peak was recognized in 3Q. Fifth Third (Nasdaq: FITB) is partly at rate lock and partly at loan funding, so the upside was split between 3Q and 4Q. Wells books at funding, which pushes the upside to 4Q."
"Looking across the rest of the industry, BofA (NYSE: BAC), BB&T (NYSE: BBT), Citi (NYSE: C), JPMorgan (NYSE: JPM), PNC Financial (NYSE: PNC) and SunTrust (NYSE: STI) all book at rate lock and are past the peak unless we get another move down in rates. FITB and USB book at a combination of rate lock and funding, and thus 4Q will probably be in the same ballpark as 3Q (but 1Q could move lower). Wells Fargo (NYSE: WFC), Huntington Bancorp (Nasdaq: HBAN) and Regions Financial (NYSE: RF) book at funding, and thus 4Q could be better than 3Q, and even 1Q could stay pretty strong."
"The market has consolidated, and the big three lenders now have over 50% share. This argues for gain on sale remaining high. Within the big three lenders, the big story is the market share shift out of BofA and into Wells, especially in correspondent lending. More broadly, regionals such as US Bank (NYSE: USB), Fifth Third and BB&T have picked up share this cycle."
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JPMorgan, Citi, Bank of America, BB&T Capital Markets, Nomura, Wells Fargo
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