Are Big Bank Stocks Safe This Earnings Season? | Where The Money Is - July 2 | The Motley Fool

TL;DR

Big bank stocks face near-term earnings pressure from slower mortgage refinancing and unrealized securities losses, but higher interest rates may benefit banks over the longer term. Wells Fargo originated over $500 billion in mortgages and refinancings in 2012, while its mortgage-banking fee income fell 9% in the first quarter. Read on for the specific earnings metrics, balance-sheet risks, and possible offsets investors should watch.

Transcript

earning season is right around the corner just how bad is this blood bath going to be you're in the right place folks because this is where the money is David we've got earning season coming up and the banks are going to be among the first companies that are going to be reporting we've got JP Morgan and Wells Fargo early on in in the earning season... Read More

Key Insights

• 😮 Wells Fargo has shown consistent earnings growth but faces challenges in the mortgage banking sector due to rising interest rates and a slowdown in refinancing activity.
• ☠️ Other comprehensive income (OCI) is an important metric to watch, as it can impact book value and stock prices for banks and insurance companies, especially in the current interest rate environment.
• ☠️ Insurance companies, like mortgage rates, are vulnerable to rising interest rates and prepayment speeds. The ability of management to adapt and maintain underwriting discipline will be crucial.

Questions & Answers

Q: Are big bank stocks safe this earnings season?

The discussion does not give a blanket judgment that big bank stocks are safe. It identifies near-term risks from weaker mortgage-banking income and unrealized securities losses, while noting that higher interest rates are better for banks over the longer term.

Q: What should investors watch in Wells Fargo's earnings?

Investors should watch Wells Fargo's mortgage-banking fee income and how the bank redirects its efforts as refinancing slows. Its mortgage-banking fee income was down 9% in the first quarter, and the speakers expect the decline to continue.

Q: Why is Wells Fargo's mortgage-banking business slowing?

Mortgage banking includes fees earned when Wells Fargo originates mortgages or refinancings and sells them to third parties. Rising rates slowed refinancing activity, which had accounted for the bulk of its mortgage volume.

Q: How large was Wells Fargo's mortgage volume in 2012?

Wells Fargo originated over $500 billion in mortgages in 2012. That total included both home-purchase mortgages and refinancings.

Q: What is other comprehensive income for banks?

Other comprehensive income tracks changes in a company's financial position that do not appear on the income statement. It includes unrealized gains and losses on securities whose prices changed but that the bank has not sold.

Q: Why does other comprehensive income matter to bank investors?

Changes in other comprehensive income affect book value, which the speakers use when valuing bank stocks. If unrealized securities losses reduce book value, they can also reduce the stock's value.

Q: How could rising interest rates affect big banks' securities portfolios?

Higher interest rates reduce fixed-income security prices, creating potential unrealized losses on banks' balance sheets. The speakers roughly estimate losses of $4 billion to $5 billion for each bigger bank, or about 2% to 2.5% of book value.

Q: Can banks offset unrealized securities losses?

Banks may have hedges that mitigate losses in their securities portfolios. Investors should therefore examine both reported unrealized losses and any offsetting hedge positions.

Summary & Key Takeaways

• Who: JP Morgan and Wells Fargo are among the banks reporting early in earnings season.

• Number: Wells Fargo originated over $500 billion in mortgages and refinancings in 2012.

• Number: Wells Fargo's mortgage-banking fee income fell 9% in the first quarter.

• Definition: Mortgage-banking income includes fees earned by originating mortgages and selling them to third parties.

• Definition: Other comprehensive income tracks financial-position changes that do not appear on the income statement.

• Definition: Unrealized gains or losses reflect price changes in securities that have not been sold.

• When: The second quarter of 2004 was the last comparable period cited for broad bank debt-security losses.

• Who: Bank of America, Citigroup, JP Morgan, and Wells Fargo recorded debt-security losses in that comparable period.

• Number: Estimated unrealized losses for each bigger bank could be roughly $4 billion to $5 billion.

• Number: Those estimated losses could equal about 2% to 2.5% of book value.

• Compare: Higher interest rates lower fixed-income security prices but may benefit banks over the longer term.

• Tool: Hedges may offset unrealized losses in a bank's securities portfolio.