Bank of America Mortgage Retreat Benefits These 6 Banks

NEW YORK ( TheStreet) -- Bank of America ( BAC)has been backing out of the mortgage market, and several banks are well positioned to pick up the slack, according to a report published Wednesday by FBR Capital Markets.

Bank of America originated just 5.6% of new mortgages in the fourth quarter, good for fourth place among U.S. lenders, but down precipitously from the roughly 20% market share it grabbed from 2007-2010 (see chart).

The bank has exited the wholesale mortgage origination business and it hopes to be out of the correspondent mortgage business by year-end so it can focus solely on retail originations.

"The bigger guys with large legacy servicing books just want out of the business," says FBR analyst Paul Miller, author of Wednesday's report. "The reputational risk is killing them. If you're Bank of America CEO Brian Moynihan, you're just getting a tremendous amount of pressure to fix the mortgage problem, modify people down--that all costs money. You sink more and more money into servicing and then you get sued by the state attorneys general for foreclosing on a house the incorrect way."

Bank of America spokespeople had no immediate response.

Miller says many small lenders began looking to Citigroup ( C)'s correspondent channel to pick up the slack, but that hasn't been an easy solution.

"Citi now has tightened up their underwriting standards pretty heavily, which kind of blindsided a lot of people," Miller says.

Citigroup spokesman Mark Rodgers wrote via email the bank "remains committed to the correspondent channel."

The trend is disturbing, of course, for those looking for a housing market rebound even though smaller lenders benefit, Miller says.

"There's not enough capacity to do the kind of loans that people want to get done, but what that does do though it makes the smaller players' profitability metrics a lot higher because there's no room to expand capacity."

Miller says the banks gaining market share in mortgage banking typically don't promote it heavily, because investors aren't too excited about the business. Nonetheless, he expects that once investors see the profit gains they will inevitability bid up the shares.

Here, then, are some of the likely beneficiaries of Bank of America's pullback:

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6. PNC Financial ( PNC)

PNC's mortgage business saw a 14% gain in its mortgage business in the fourth quarter versus 2010, though it still ranked just 17th in the quarter with just 0.8% market share, according to FBR and trade publication Inside Mortgage Finance.

FBR's Miller has an "outperform" rating on PNC and he recently increased his price target to $68 from $60 following the bank's fouth quarter earnings release. PNC reported a significant earnings miss due to one-time charges related to a potential foreclosure settlement and the calling of trust-preferred securities. However, Miller believes the real story behind this earnings release was the guidance management provided surrounding its acquisition of the Royal Bank of Canada's U.S. operation for $3.45 billion.

"Taking into account management's guidance for mid-high single digit percentage increases in revenue combined with mid-single-digit increases in expenses, we believe consensus operating estimates need to rise from their current level near $6.30," Miller wrote.

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5. USBancorp ( USB)

USBancorp saw its market share in mortgage originations rise 30% in the fourth quarter versus all of 2010 to 4.6% of the market.

Miller reiterated his "outperform" rating on the shares, increasing his price target to $33 from $32 following the fourth quarter earnings release.

"This quarter was another strong result where the company continued to take market share from other commercial lenders and still show considerable improvement in credit metrics while others are starting to see the pace slow," Miller wrote. He argues management's conservative stance, the bank's diverse platform, and the company's significant commercial and industrial and auto lending businesses have positioned the bank "to thrive in any economic environment."

FBR estimates USBancorp has roughly $4.3B of current excess capital over regulatory requirements. Miller expects the company to use roughly $1.5 billion of the excess capital buying back stock and another $1.1 billion to issue dividends during 2012.

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4. Wells Fargo ( WFC)

Wells Fargo captured a whopping 30.1% of the mortgage market in the fourth quarter--a 21% jump from 2010. The bank has been clear about its commitment to the correspondent mortgage business, as the head of that unit, Eric Stoddard, discussed in an interview last year.

During Wells Fargo's conference call following its release of fourth quarter earnings, CFO Timothy Sloan attributed the $627 million rise in noninterest income largely to the $531 million increase in mortgage banking revenues. That was 29% higher than the third quarter, and Sloan said it was driven by higher margins and strong originations. Originations increased $31 billion or 35% from the third quarter. The unclosed mortgage pipeline remained "very strong," according to Sloan, at $72 billion at quarter end.

FBR reiterated its "Outperform" rating and increased its price target to $33 from $33 following Wells Fargo's fourth-quarter earnings release. Miller cited "the company's relatively stable earnings stream, coupled with its strong capital position," in raising his target, arguing Wells should command a higher multiple.

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3. Fifth Third Bancorp ( FITB)

Fifth Third grabbed 1.8% of the mortgage origination market in the third quarter, good for 13th place, and 37% better than 2010. CFO Dan Poston attributed the bank's improved net interest margin and net interest income in part to growth in the residential mortgage portfolio, though he also cited growth in commercial and industrial, credit card and auto loans.

FBR reiterated its "outperform" rating and $15 price target following Fifth Third's fourth-quarter earnings release on January 20, 2012. The bank beat FBR's earnings estimate primarily due to higher net interest income on higher loan balances and lower provision expense. Fifth Third grew loan balances by 5% on a period end, which FBR called "one of the strongest quarters for balance sheet growth among banks."

Fifth Third shares underperformed peers after reporting earnings as, according to FBR, "some investors saw the decline in fee income as a sign that the company may not be able to grow earnings as fast as anticipated. However, we would note, Fifth Third has outperformed many regional bank peers by 10%-20% over the last few months, and anything but perfection in in the fourth quarter seemed to be priced into shares."

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2. New York Community Bancorp ( NYB)

New York Community saw its mortgage origination market share remain roughly flat at just 0.7% during the fourth quarter as compared to where it stood in 2010. Nonetheless, FB's Miller believes that will change going forward.

During the company's conference call following fourth quarter earnings, President and CEO Joseph Ficalora referred to "strong" mortgage banking income of $24.7 million.

Ficalora also highlighted potential government boosts to the mortgage business on the call.

" The reality is that there are people in the Congress that recognize that some aspects of the regulatory environment are presenting a conflict with the ability for banking, at least, to increase its lending. So there is an effort in Washington to try and re-stabilize the situation somewhat," he said

Thomas Cangemi, the bank's CFO, added that "given our positioning as a mortgage bank, given the timeframe when we actually got into the business, if there is, let's call it, significant changes on the residential side to stimulate activity in the mortgage financing market, we should be a beneficiary there."

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1. BB&T Corp. ( BBT)

BB&T saw a 33% gain in market share, comparing the fourth quarter of 2011 to all of 2010. During the quarter it captured 2.1% of the total market, according to the FBR report.

BB&T Chairman and CEO Kelly King noted that "the pace of growth accelerated during the quarter," while highlighting mortgage banking, along with commercial and industrial loans and the bank's "Direct Retail," business as among the chief drivers.

Mortgage banking income was up in the fourth quarter to $135 million compared to $123 million last quarter, a gain CFO Daryl Bible attributed to "higher production volume and larger gains on sales," in comments during the fourth quarter earnings call.

BB& T "should be set up to continue growing earnings over the next few years as charge-offs normalize and as the company starts to return capital to shareholders," wrote FBR's Miller in a report published Jan. 20. He has a market perform on the stock, however, arguing the shares are fairly valued versus peers.

-- Written by Dan Freed in New York. Follow this writer on Twitter.