The Deal: Wall Street Takes Heart From Fed Chair Testimony
Dealmakers looking forward to a moderation in market volatility as good for M&A activity will still have to cope with a challenging economic environment that will continue to quell appetite for bold acquisitions.
Wall Street banks have shown their sensitivity to rising rates this earnings season. Since late June, 30-year fixed mortgages have risen from around 3.93% to 4.78%, triggered by the expectation of stimulus withdrawal. Bank of America Corp. ( BAC) CFO Bruce Thompson said Wednesday on the company's second-quarter earnings call that rising long-term rates would be an immediate negative for its mortgage business, crimping demand for both refinancing and new loans. Around 83% of BofA's home loans were from refinancing, with just 17% from new purchases. Its home loan income was down 22% to $1.41 billion from the prior period, a trend broadly reflected in results from America's two largest mortgage lenders, Wells Fargo & Co. ( WFC) and JPMorgan Chase & Co. ( JPM). JPMorgan CFO Marianne Lake has warned that mortgage refinancing could dive by 30% to 40% in the second half while fresh loan growth remained tepid. Longer term, banks are expected to benefit from the rise in interest rates, reaping higher returns from new loans amid a stronger economic backdrop. The central banker reassured Congress the Fed would "watch to see if the movement in mortgage rates has any material effect on housing" to ensure the housing market continued to support the economic recovery. Written by Jane Searle