QE3 Will Hurt, Not Help Small Banks: Analyst

NEW YORK (TheStreet) -- Think the $40 billon mortgage bond purchase by the Federal Reserve -- known as QE3 -- will increase consumer demand for loans and the financial fortunes of Main Street lenders?

Not so fast, says Bank of America analyst Erika Penala.

In a survey of regional bank management teams within Bank of America's coverage, the vast majority of Main Street lenders don't expect any surge in consumer or mortgage loan demand and are not bracing for a big lending rebound, writes Penala in a Monday note to clients.

In fact, instead of being a tailwind, Penala notes QE3 could very well be a next hit to regional bank earnings, which already suffer from record low interest rates and a weak housing market recovery.

The crux of the survey indicates that instead of gearing up for a frenzy of demand for new mortgage loans or a surge in refinancing in the wake of QE3, regional banks - think Main Street lenders - are actually battening down the hatches in anticipation of a further Fed-driven revenue drain.

"Our survey results indicate that most bank management teams do not believe that the liquidity rush from QE3 will translate into increased loan demand, nor will it increase the propensity to lend," writes Penala. Because QE3 is expected to lower overall mortgage rates and yields on the securities that banks hold against deposits, the newest Fed program may in fact be a detriment to earnings, according to Penala's survey.

In a poll of 14 regional bank management teams, Penala found 11 banks did not expect to increase lending, given already high levels of refinancing. Among the four lenders bracing for a lending surge, two banks were focused on auto loans and not mortgages.

"As such, lending revenue trends should continue to be challenging, and margin compression could be worse than expected given QE3," Penala writes. The analyst highlights Regions Financial (RF) and Wells Fargo (WFC) to remain outperformers given their respective exposure to improving consumer credit and accounting gains on mortgage refinancing's, in addition to a general third quarter bank sector stock rally.

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