National City, SunTrust May Say Net Fell on Mortgages (Update1)
By Will Edwards
April 11 (Bloomberg) -- National City Corp., Capital One Financial Corp. and SunTrust Banks Inc. may report lower first- quarter profits as the worst housing slump in more than a decade reduces income from mortgages.
Earnings per share for the 10 largest regional U.S. banks fell an average 1.1 percent in the first three months from a year earlier, according to analysts' estimates compiled by Bloomberg. The last decline occurred in the fourth quarter of 2004.
The end of the five-year boom in home sales reduced demand for mortgages and the fees banks earn. Delinquencies are spreading from homeowners with subprime mortgages to those with better repayment records. M&T Bank Corp., partly owned by Warren Buffett's Berkshire Hathaway Inc., said March 30 that defaults by people with higher credit ratings hurt first-quarter profits.
``We could see other similar earnings shortfalls,'' said Mark Batty, an analyst at Philadelphia-based PNC Wealth Management, which oversees $50 billion and owns shares of Wells Fargo & Co. and Wachovia Corp. Wells and SunTrust reduced mortgages requiring little money down or proof of income, he said. ``We'll see whether they moved fast enough.''
Wells Fargo, based in San Francisco, is the only regional bank with more than 10 percent of its loans to subprime borrowers, according to a March 26 report from Banc of America Securities analysts. National City's are at 8 percent and Charlotte, North Carolina-based Wachovia's are 6 percent, the report said. None of the other top 10 regional banks has more than 5 percent of its total loans with subprime borrowers.
Bank Stocks
Bank stocks have fallen this year as mortgage defaults increased. The Standard & Poor's 500 Index of regional banks fell 2.2 percent in the first quarter, led by Huntington Bancshares Inc.'s 8 percent drop.
Net income at Wachovia and Regions Financial Corp. probably rose after gains from acquisitions. Wachovia's stock declined 3.3 percent in the first quarter and shares of Regions Financial fell 5.4 percent. Wachovia reports on April 16, SunTrust and Regions Financial on April 17, Capital One Financial Corp. on April 19 and National City on April 30.
Bank profits were pinched last year because the Federal Reserve's 17 rate increases made lenders pay more for deposits while loans were earning less interest. Wells Fargo was the only one of the top 10 regional banks to boost its net interest margin.
A rate reduction by the Federal Reserve might offset some of the plunge in subprime asset values. Regions Financial of Birmingham, Alabama, completed the sale of its EquiFirst subprime unit to Barclays Plc April 2 for $76 million, a third of the price the London-based bank agreed to pay when the sale was announced in January.
Rate Cut's Impact
``From a sentiment standpoint, a Fed rate cut could be huge,'' said Chris Hagedorn, who helps manage about $22 billion at Fifth Third Asset Management in Cincinnati, including Wachovia and Wells Fargo shares.
Sales of bonds backed by subprime loans are declining this year, with $79.3 billion issued, down 37 percent from the same period in 2006, according to a March 30 report by New York-based Citigroup Inc. For banks, that means less revenue from selling mortgages to firms like Bear Stearns Cos. that package the loans into securities.
Some banks are holding on to loans instead of selling at depressed prices, betting mortgages will rebound. That's what National City decided last month when it scrapped plans to sell $1.6 billion of home loans including subprime mortgages. The move will cost the Cleveland-based bank at least $11 million in writedowns to reflect current market values, it said March 14.
M&T's Outlook
``Nobody wants these loans right now,'' said Steven Picarillo, an analyst at Dominion Bond Rating Service in New York. ``Why take a 30 percent haircut on these loans just because they have the word `subprime' on them?''
Fed Chairman Ben Bernanke and Bear Stearns, the biggest underwriter of mortgage bonds, said they don't see subprime woes spilling over into safer loans, such as Alt-A mortgages. Those are granted to people with good credit histories who don't meet some guidelines for conventional loans.
Shares of M&T fell 8.5 percent on April 2 after the Buffalo, New York-based company cut its earnings forecast by $7 million because of Alt-A loans. Like National City, it plans to hold $883 million of mortgages instead of selling at current prices.
Capital One, based in McLean, Virginia, holds about $10 billion of Alt-A loans and Atlanta-based SunTrust has $2.5 billion to $3 billion, A.G. Edwards analyst David George wrote in a research note after the M&T announcement.
``M&T shook things up because it's a very well-run, plain- vanilla bank,'' said Jefferson Harralson, a Keefe Bruyette & Woods Inc. analyst in Atlanta. ``It could mean we're going to see it at other banks.''
To contact the reporter on this story: Will Edwards in Charlotte, North Carolina, at wiedwards@bloomberg.net
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