While mortgage-intensive banks may have an impact on their profits due to lower originations, they can mitigate that by strategically redistributing excess cash, according to a report by Keefe, Bruyette & Woods.
The improving US economy and rising vaccination rates have contributed to rising mortgage rates in recent weeks.
"And while interest rates are still very low by historical standards, we believe this will have a dampening effect on mortgage banking results for many banks in the coming quarters," said Chris McGratty, head of US bank research at KBW. "Looking ahead, however, we expect mortgage lending revenues to weaken in 2021 (-18% decrease from 2020 for all banks) and further into 2022 (-10% decrease compared to 2021 for all banks), and this pressure is more pronounced. " mortgage-heavy banks. "
Its list of mortgage-intensive banks includes Hilltop Holdings (the parent company of PlainsCapital Bank and PrimeLending), Flagstar, MVB Financial, FB Financial, Ameris Bancorp, National Bank Holdings, and First Western Financial.
Flagstar is also on McGratty's list of 10 mortgage lenders expected to see a decline in revenue as non-bank mortgage lenders need these short-term loans less.
According to an analysis by the banks, followed by KBW, income from mortgage banking increased from 2% in 2019 to 4% of total sales in 2020. KBW expects sales to decline by 3% by 2022.
For the mortgage-heavy banks, however, this business accounted for 21% of total revenue in 2020, down from 10% in 2019. This revenue is expected to drop to 15% in 2021 and 13% in 2022.
The KBW model found that the seven banks listed above expect an average decline in mortgage lending revenues of 41% over the next two years. While profit from sales margins is likely to shrink, service returns should increase as mortgage service rights stay on the books longer with fewer refinances.
For investors, this means the potential headwinds from the slowdown in mortgage lending activity will largely be captured in earnings per share estimates, McGratty said. However, the presentation of the EPS revisions should also contain the potential for positive sales adjustments due to the use of excess cash.
"In other words, the analysis of one-variable EPS sensitivity (mortgage) is incomplete without also assessing the upside potential of EPS against what we believe to be a far more significant return lever over time (excessive cash use)," he said.
He writes that the most attractive remixing option would be to invest 50% in securities, including mortgage-backed securities, and 50% in other forms of loans.