In his early preview of third-quarter earnings for the large-cap banks covered by his firm, Juneja on Wednesday wrote that the group would be facing significant revenue pains, including a major decline in mortgage loan originations and a decline in gain-on-sale spreads for newly originated loans sold to Fannie Mae and Freddie Mac, "which worsened in September."
In addition to the mortgage decline, which has been widely signaled to investors through an array of economic reports and projections from the Mortgage Bankers Association, Juneja expects a "Larger than normal seasonal decline in capital markets," along with "weak loan growth" and a narrowing of net interest margins "for some."
That last comment may surprise some investors, since the market yield on 10-year Treasury bonds has soared by over 110 basis points since the end of April, in anticipation of a decline in bond purchases by the Federal Reserve. The Federal Open Market Committee will finish its two-day policy meeting Wednesday, after which the committee is expected to announce a modest tapering of the central bank's long-term bond purchases, which have been running at a net $85 billion per month since last September, as part of the "QE3" effort to hold down long-term interest rates.But for most banks, a parallel rise in interest rates is needed to significantly boost net interest margins and net interest income, and some assets are continuing to reprice at lower rates. The short-term federal funds rate has been locked in a historically low range of zero to 0.25% since late 2008, and the FOMC has repeatedly said it was unlikely to raise the target rate at least until the national unemployment rate drops below 6.5%. The August unemployment rate was 7.3%, improving slightly from 7.4% in July. Federal Reserve chairman Ben Bernanke is scheduled to hold a press conference at 2:30 p.m. ET Wednesday. According to Juneja, a 20% to 30% drop in mortgage revenue for the big banks will be partially offset by higher servicing revenue. He added that "investment banking volumes slowed in 3Q, most notably in debt underwriting, which was hurt by the impact of rising interest rates in August," and also wrote that "3Q trading revenues are likely down double digits on both a [quarter-over-quarter and year-over-year] basis reflecting a greater than normal seasonal drop in activity levels."
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