Markets & Finance

Banks Battle Housing Woes


Increasingly, industry players may be judged on how well their mortgage businesses navigate a tricky housing market

With scores of banks reporting earnings Thursday, July 19, and earlier in the week, investors are learning how banks are doing against the backdrop of a slow housing market and worries about mortgage defaults.

Business for most banks is good, if not great. Fee and interest income is helping to offset problems in residential lending.

According to data from Reuters Estimates, ten of 17 big U.S. banks that have reported so far beat analysts expectations. Another three banks met expectations and four missed estimates.

Beating forecasts were Bank of America (BAC), which reported earnings of 67 cents per share on Thursday. SunTrust (STI) beat expectations with earnings of $1.49 (excluding a one-time gain from the sale of stock), 5 cents above expectations.

Washington Mutual (WM) profits were up 16%. The fast-growing bank reported good growth for retail banking, credit card and commercial businesses. WaMu's home loans business improved but is still unprofitable.

BB&T Corp. (BBT), Wells Fargo (WFC) and Regions Financial (RF) met expectations, while First Horizon National Corp. (FHN) fell short.

Many bank shares were falling slightly or barely moving higher despite good earnings figures. That may be a sign of rising worries about how well banks can navigate this tricky housing environment.

Investors are worried about the fallout from skyrocketing defaults on subprime mortgages, home loans to people with poor credit histories. Bear Stearns (BSC) recently said two hedge funds that held subprime debt were virtually worthless.

There are signs defaults and delinquencies are spreading beyond subprime to other types of home loans. The problem is made worse by declining home prices in many parts of the country. Falling home values mean residential loans' collateral isn't worth what it was a year or two ago.

How will all this affect banks? No one really knows. While residential lending is important to many banks, their profits also depend on credit cards, other kinds of lending and various fees. Interest rates also have a big effect on how much banks earn.

Many mainstream banks stayed away from subprime entirely and only dabbled in other risky types of loans. But they're still vulnerable to defaults on residential mortgages. And, they're seeing slower growth in the new mortgages that provided big profits during the housing boom.

Despite housing's problems, Standard & Poor's equity analyst Erik Oja expects consumer and home equity loans to grow in the "low single digits" for the regional banks he covers. "Part of that is because banks are trying to be more careful," Oja says.

There is a real difference between banks in how well they avoid risky loans, Oja says. The best banks are willing to sacrifice earnings in the short term by carefully screening and reviewing their loans. "Credit quality will come back to bit you a year or two down the road," he says.

Several banks have been hit by problems with residential loans, particularly loans to developers.

Much of the devil is in the details: Analysts keep close eyes on what percentage of a bank's loans are "non-performing." So far, those numbers aren't at alarming levels, though credit quality is deteriorating for many.

Steverman is a reporter for BusinessWeek's Investing channel.

We Almost Lost the Nasdaq
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

Sponsored Financial Commentaries

Sponsored Links

Buy a link now!

 
blog comments powered by Disqus