Can Big Banks Neutralize the Refinancing Slump?

Bank of America

The country’s biggest banks faced scandals and other negatives from the mortgage business, yet the revenue was always on the positive side of the equation. According to the latest earnings reports, the days of the refinance boom are over. Shrugging off the impact and moving on to the next source of revenue is the strategy banks are taking to combat this paradigm shift. Analysts say the move should work out fine.

NYSE Bulletin noted the take of Oppenheimer’s Chris Kotowski. Mortgage revenues are down, Kotowski acknowledges, but there’s plenty of good news when looking at other aspects of the big banks’ business. Companies like Citigroup (NYSE:C) may be cutting staff in their loan departments, yet investment banking revenue is robust.

Mortgage revenues slumped 12.5 percent in the second quarter among the biggest banks (compared to the same period in 2012), while revenues in investment banking shot up 33 percent. That indicates the imposing reach of banks like JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC), who are back to performing well while getting an improved public image.

The loss of revenue, along with the shrinking of the biggest banks’ mortgage departments, would indicate the refinance boom has seen better days. Analysts from The Street point out the slight uptick in mortgage rates as the reason behind the slowdown, but nothing speaks a better case than the layoffs within the mortgage ranks. Wells Fargo (NYSE:WFC) joined Bank of America is cutting back on mortgage staffers.

Oppenheimer’s Kotowski pointed out the 4.1 percent increase in fee revenue, per NYSE Bulletin. There is a far bigger scope to the operations of each of the six big banks, so investors are not accentuating the negative when it comes to investing in these top banks. Instead, the markets have seen investors rally around the biggest financial institutions, whether or not increased regulation is on the way.

As The Street reported, Kotowski says something “always zigs when other things are sagging [sic].” The zig of the moment for the top banks is in investment banking. It has been enough to neutralize the effects of slowing mortgage business and can sustain the top banks’ revenue sources if refinancing continues to disappoint.

CNBC’s Jim Cramer pointed out his love for profit margins when discussing the latest earnings reports from the industrials, and the same principle applies to this element of the banking industry. Kotowski reminds investors of the low profit margins for banks in the mortgage business. The biggest benefit is the banks’ ability to market other products when customers come in for refinancing.

That ability to market other products while the customer is in the show room may be declining for big banks, but there aren’t dire consequences, according to Kotowski. “We do not…live in dread wondering about whether bank earnings will collapse when the refi window closes,” he wrote, per The Street.

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