“We’re stuck in neutral,” said Nancy Bush, contributing analyst for SNL Financial. “Nobody has massively disappointed. The pieces are just not in place yet for a great renaissance in bank earnings.”
The good news, said banking analyst Mike Mayo of CSLA, is banks have “improved costs, credit and capital so that the industry is much safer than it was a few years ago.” The downside is that “revenue growth this decade is on pace to be the worst it’s been since the decade of the Great Depression.”
For several quarters, bank earnings have been fueled by homeowners refinancing their mortgages. That business leveled off during the spring as interest rates crept up amid speculation that the Federal Reserve would taper its stimulus program. The central bank’s monthly bond purchases have tamped down interest rates to the benefit of banks, which welcomed a flood of homeowners eager to take advantage of lower rates.
Industry analysts anticipated the boom to taper off this year as the number of loans eligible for interest rate reductions dropped. Among 15 of the banks that have reported earnings to date, originations were down 16 percent on average, according to Barclays Capital.
All of the firms reported lower refinance volume and relatively flat purchase activity. Researchers at Barclays said applications and loans in the pipeline are down around 40 percent from where they were a year ago.
Wells Fargo, which handles about a third of the mortgage market, received $87 billion worth of mortgage applications last quarter, compared with $188 billion a year ago. Mortgage banking income also tumbled 43 percent.
“We’re in a transitional period in our mortgage business,” Wells Fargo Chief Financial Officer Timothy Sloan told analysts on a call. “We’ve managed through many refi cycles in the past and remain committed to the mortgage business.”
Banks have responded to the decline in business with rounds of layoffs in their home loan units. Wells Fargo sent pink slips to 5,300 employees in its home loan division in the third quarter, while JPMorgan Chase, the nation’s second-largest mortgage lender, let go about 3,000 workers in its unit.
“We’re experiencing moderate economic growth and one of the downsides of that for a lender is the refinance business goes away pretty fast,” said Michael Fratantoni, vice president of research and economics at the Mortgage Bankers Association, a trade group.
Fratantoni expects the mortgage industry will achieve about $1.7 trillion in loan origination volume in 2013, compared to $2 trillion a year ago. He is confident that the purchase of new homes will increase about 10 percent this year. But the pickup in new home lending, he said, will not compensate for the drop in refinancing activity.
As the mortgage slowdown takes hold, there are some bright spots in other types of lending. Demand for auto loans and commercial real estate loans bolstered Wells Fargo’s overall loan portfolio, which grew 4 percent to $812.3 billion in the third quarter.
Another sign of strength within the industry is the decline in troubled loans. On average, the amount of money that banks set aside to cover losses on loans is down 30 percent from the previous year, an indication that the quality of the assets has improved, according to Barclays.
“It’s surprising that credit quality has improved as much as it has and as long as it has, but sooner or later that will come to an end,” said Bush of SNL Financial. “We need to get some lift in this economy where people actually want to borrow money. That’s the thing missing.”
At investment banks, a slump in fixed-income trading — transactions involving bonds — took a bite out of revenue at Goldman Sachs, JPMorgan and Citigroup. Fixed-income revenue tumbled 16 percent at JPMorgan, 17 percent at Citigroup and 49 percent at Goldman. Uncertainty about monetary policy and the federal budget morass made institutional asset managers skittish about trading, analysts say.
“The level of risk-taking has been reduced,” said Mayo of CSLA. “And the question is: Has the degree of risk-taking been reduced so much as to not facilitate the economy the way a banking system should?”
After years of trudging through litigation rooted in the financial crisis, a number of banks reported a reduction in the amount of money they hold to cover legal costs.
Bank of America, which contended with a mountain of liabilities tied to its 2008 purchase of Countrywide Financial, reported a decline from $1.6 billion to about $1 billion in litigation expenses for the quarter. The bank has spent more than $40 billion on legal costs since 2010.
“We’ve tried to be out front and get through some of the larger settlements that we have, and we think that $40 billion-plus number reflects that,” Bruce Thompson, Bank of America’s chief financial officer, said on a call with analysts.
JPMorgan, however, continues to grabble with massive legal costs. The bank poured $9.2 billion into its litigation coffers for the quarter, which resulted in a net loss of $980 million — the bank’s first loss in nearly a decade.