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Big Bank Mortgage Performance Has Been Better Than Expected: KBW

NEW YORK ( TheStreet) -- Banks that have reported so far have largely beaten expectations for the second quarter.

According to analysts at financial research outfit KBW, of the 33 banks in their coverage that have already reported, 76% beat expectations, while only 6% missed.

Notably, the big banks -- JPMorgan Chase (JPM - Get Report), Wells Fargo (WFC - Get Report), Citigroup (C - Get Report) and Bank of America (BAC - Get Report) -- all beat expectations.

One of the positive surprises in the quarter was mortgage banking, which came in better than expected.

Analysts had forecast a bigger slowdown in performance, on the back of a steep fall in refinance volumes and declining profitability from the sale of mortgages.

But total origination volumes were down by a more modest 1.2%. Wells Fargo, Bank of America, Fifth Third (FITB - Get Report), BB&T (BBT) and PNC Financial (PNC) reported sequential increases, the analysts note, while JPMorgan, Citigroup and U.S. Bancorp (USB) saw a drop in volumes.

Gain-on-sale margins held up relatively well, though the analysts expect more declines in the second half.

Banks with large mortgage servicing rights benefited from higher valuations. Rising rates reduces prepayment risk, lengthening the life of a mortgage and improving cashflows for servicers.

MSR valuations increased by 16 basis points on average, or about 22%, among the companies KBW tracks.

Banks continue to see mortgage repurchase requests, on claims that they misrepresented the underlying quality of the mortgage when they sold them to investors. Representation and warranty expenses remained elevated but showed positive trends quarter-over-quarter. Mortgage repurchase reserves declined 4.1% for Wells, 7.4% for JPMorgan and about 1% for Bank of America.

Still, the outlook for the second half remains relatively bleak. JPMorgan warned that if interest rates stay at these levels, the refinancing market could shrink by about 30% to 40% and there could be a "dramatic" drop in profitability.

KBW analysts too expect refi volumes and gain-on-sale margins to decline in the second half of the year.

PHH (PHH), Flagstar Bancorp (FBC), Nationstar Mortgage (NSM), Walter Investment (WAC), PennyMac (PMT) and Redwood Trust (RWT) are some of the prominent mortgage companies yet to report whose results may merit watching.

-- Written by Shanthi Bharatwaj New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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