With bank earnings just around the corner, analysts with FBR Capital Markets say big banks exposed to mortgages are favored long-term, but subject to headwinds in the near future.
Banks outperformed until mid-March with the KBW Bank Index up 12%, while the S&P rose 9% during that time, said Paul Miller, managing director with FBR Capital Markets.
But the banks’ performances recently turned with the KBW Bank Index rising a more modest 6.6% year-to-date, compared to 8.9% for the S&P 500.
The reality is the firms are feeling the pinch of “noisy international markets, historically low interest rates and flat loan balances limiting opportunities for earnings growth,” Miller said in his report.
Total industry originations in the final quarter of 2012 hit $525 billion, a figure that could fall 20% to 25% based on FBR Capital’s estimations.
Still, on the positive side, volumes grew in March and FBR Capital continues to look at Discover Financial Services, Walter Investment Management Co. (WAC), Nationstar Mortgage Holdings (NSM) and First Republic Bank (FRC) favorably.
Yet, firms heavily focused on mortgage originations remain concerns with analysts expecting weaker results for Q1 due to sagging originations and seasonal trends impacting the market.
“We would avoid origination-reliant names, particularly those with valuations materially above tangible book value,” FBR Capital wrote.
“That said, we continue to expect the remaining part of 2013 to be strong given tailwinds from government programs related to credit easing and a continuation of low interest rates,” Miller noted.
FBR Capital reduced Fifth Third Bancorp’s (FITB) earnings per share for the first-quarter of 2013 to 36 cents EPS, down from 39 cents due to expected drops in originations.
Lower origination volumes also prompted FBR Capital to lower 1Q earnings expectations on Flagstar Bancorp (FBC), SunTrust Banks (STI), Bank of America (BAC), U.S. Bancorp (USB) and Wells Fargo (WAC).
