Mortgage Refi Boom Coming to an End but Don't Worry, Analyst Says

NEW YORK ( TheStreet) -- The mortgage refinancing boom is coming to an end but that may not mean gloom and doom for the country's biggest banks.

In a July 25 note, Oppenheimer analyst Chris Kotowski notes that fee income for the big six banks -- Bank of America ( BAC), JPMorgan Chase ( JPM), Citigroup ( C), Wells Fargo ( WFC), U.S. Bancorp ( USB) and Capital One ( COF) -- was up 4.1% year-over-year, despite the decline in mortgage banking revenues.

That is because banks had other offsets, such as stronger investment banking revenues. He notes that mortgage banking revenues declined 12.5% year-over-year but investment banking revenues rose 33% and trust/brokerage/asset management fees rose 12.8%.

"Big banks' fee revenues are more diverse than people expect. Something always zigs when other things are sagging," Kotowski wrote. "In retrospect, it makes total sense that at this point last year, the economic uncertainty that brought a stampede into the bond market and generated all that re-fi activity would also have led to a dearth of investment banking activity, and now it makes sense that greater confidence leads to higher rates, fewer refi's but more banking."

He also notes that though mortgage banking accounts for a decent chunk of revenue at the big banks, it does not generate a whole lot of the profits. For instance, at JPMorgan, mortgage production revenue of $2 billion adds only $1 million to the pre-tax line and just about 6% to the earnings per share. Even if the bank had earned half as much from mortgage banking, it would have still more or less been on target on earnings.

So does mortgage banking really matter? "Mortgage banking revenues are important in that they generate a servicing portfolio which creates an ongoing annuity. They can also be an important window into a client that can be 'cross-sold' other products. We do not, however, live in dread wondering about whether bank earnings will collapse when the refi window closes, which it inevitably will," Kotowski said.

Kotowski also weighs in on the bank rally in the report. Though there was nothing startling about second quarter earnings reports, the KBW Bank Index is still up over 8% since his June 28 preview, compared to the S&P 500's return of 5%.

"While the earnings growth has been robust, what we think has really cheered investors the most is the stability and predictability," he wrote in a June 25 report.

While bank earnings have been recovering since 2011, the early quarters were very volatile. There is less volatility now, notes Kotowski.

According to the analyst, "as long as credit quality is good, banking is a fairly predictable law of numbers kind of thing."

Although banks are no longer undervalued, it is still worth staying in the group, he says. "While it is hard not to have a 'profit-taking' mentality after the 89% run in the BKX since the 2011 lows, one needs to keep perspective that the stocks are still slightly undervalued to the S&P historically, that the regulatory changes have stabilized, that they are likely to grow earnings in line with the S&P and that the resumption of loan growth is still to come," he wrote.

-- Written by Shanthi Bharatwaj in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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