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Banks Feeling Rates' Bite

National City and Keycorp are the latest to warn. Annaly gets skewered.
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Two Cleveland banks took down earnings guidance Wednesday, citing the impact of higher interest rates on mortgage lending.

National City

(NCC)

lowered full-year guidance to $3 a share, compared with analyst estimates of $3.39 a share, while

Keycorp

(KEY) - Get KeyCorp Report

said it expects to earn $2.10 a share in 2003, compared with the Thomson First Call consensus of $2.12.

National City said its consumer-lending business remains strong and claimed it's gaining market share in commercial finance. But the bank said higher interest rates led to a significant reduction in mortgage refinancing applications and warned that if rates hold steady or move up, "the result would likely be a considerable decline in mortgage banking earnings from recent levels."

The company noted that higher rates could result in an accounting situation where its hedging portfolio declined in value and had to be expensed on the income statement while an increase in the value of its mortgage servicing rights was deferred.

"While the ultimate valuation of mortgage servicing assets and the outcome and accounting effectiveness of hedging strategies for the third quarter are not yet known, management believes, based on current financial market conditions ... that mortgage banking revenue, including net hedging results, will be significantly lower in the third quarter as compared to the first and second quarters as this business transitions to operating in a higher interest rate environment," the company said in an

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filing.

National City said its other segments are performing well and credit trends are generally improving. The stock was down $1.81, or 6%, to $30 on the Instinet premarket session. No trades had crossed on Keycorp.

On Tuesday,

Washington Mutual

(WM) - Get Waste Management, Inc. Report

, the nation's biggest thrift, warned that third-quarter profits could be hit by a sharp decline in mortgage underwriting due to the spike in interest rates this summer.

A REIT set up to own mortgage bonds called

Annaly Mortgage Management

(NLY) - Get Annaly Capital Management, Inc. Report

said historically high prepayments will result in a sharp increase in its third-quarter amortization expense. The company forecast a dividend of 25 cents to 30 cents. It paid a 60-cent dividend on July 31.

The shares were getting hammered in premarket trading, recently falling $3.46, or 18%, to $15.50.