Jefferies also said mortgage production revenue for the group of eight large-cap banks more than doubled in 2012. The firm estimates that their mortgage production revenue will decline by 19% during 2013 and by another 24% in 2014.

Usdin says Wells Fargo ( WFC) will take the biggest hit on gain-on-sale margins during 2013, with the margin declining by 43 basis points to 1.92%, dropping further to 1.55% in 2014. Jefferies also estimates that Wells Fargo's mortgage production revenue will decline to $8.79 billion in 2013 from $12.2 billion. For 2013, Usdin estimates Wells Fargo's mortgage production revenue will total $6.63 billion.

Usdin rates Wells Fargo "buy," with a $39 price target, estimating the company will earn $3.55 a share this year, with EPS increasing to $3.65 in 2014.

A Downgrade for SunTrust


Usdin on Friday downgraded SunTrust ( STI) of Atlanta to "hold" from "buy," while lowering his price target for the shares to $30 from $32. "We are more concerned about the revenue transition gap that could emerge with the likely refi slowdown and gain-on-sale margin normalization."

Jefferies estimates that SunTrust's mortgage gain-on-sale margin will decline to 2.86% in 2013 from 3.29% in 2012, with the margin declining further to 2.61% in 2014. The firm also estimates that the bank's mortgage production revenue will decline to $828 million this year from $1.056 billion in 2012, declining further to $679 million in 2014.

Usdin estimates the company will earn $2.70 a share this year, with 2014 EPS of $2.85.

Taking It a Step Further


Jefferies conducted a "static test," which Usdin described as a "'what if?' scenario in which gain-on-sale margins reverted to 2011 levels overnight." The analyst said "banks in our stress test could see 5% negative EPS revisions for 2013 and 3% revisions in 2014 vs. our published EPS estimates."

SunTrust, along with BB&T ( BBT) of Winston-Salem, N.C., and Fifth Third Bancorp ( FITB) of Cincinnati "screen the worst in our simple exercise, relatively speaking, given the size of their underlying mortgage businesses and above-average gain-on-sale margin expansion seen over the last year, Usdin said.

Under the "2011" scenario, SunTrust's 2013 EPS estimate would decline by $0.27 and his 2014 estimate would decline by $0.16.

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