Wednesday, April 18, 2007

Sub Prime Problems Start to Hit Bank Earnings

From the WSJ:

Of the six banks that reported earnings yesterday, four -- SunTrust, U.S. Bancorp, Comerica Inc. and M&T Bank Corp. -- saw net income fall from the year-ago quarter. KeyCorp, of Cleveland, posted a 31% gain in quarterly profit, helped by the sale of its McDonald Investments unit.


Wells Fargo cited higher losses on home-equity loans in the Midwest and in central California. Howard Atkins, Wells's chief financial officer, said deterioration in certain markets was caused by rising interest rates on some mortgages combined with falling home prices, creating very high loan-to-value ratios that made it difficult for borrowers to refinance out of high-cost loans.


Minneapolis-based U.S. Bancorp said net income fell 2% from a year ago, citing higher credit costs and operating costs of acquired businesses and lower net-interest income, which offset growth in fees.

SunTrust saw net income fall 2%. While revenue grew 1% and outpaced growth in expenses, it wasn't enough to overcome an increase in the provision for loan losses. SunTrust said nonperforming loans rose to 0.57% of total loans from 0.25% a year ago, largely due to slipping credit quality on low-documentation, or "Alternative A," loans.

Detroit-based Comerica said net income fell 2%, despite a tight rein on expenses, due to a higher loan-loss provision.

M&T Bank, based in Buffalo, said profit fell 13% due to previously disclosed declines in mortgage revenue. The bank said buyers of Alternative A loans are getting scarce, forcing M&T to keep more loans on its books.

This is the kind of news that leads to the following development:

1.) Banks tighten their lending standards. There is already tightening going on in the subprime market. Don't be surprised to see this trend extend to other, better quality loans.

2.) Expect banks to begin slipping loan loss provision increases into statements. They will try to minimize the effect of these statements, so you have to keep an eye out for the odd announcement here and there.

3.) Expect to hear more stories about people with exotic mortgages having trouble refinancing.

4.) Foreclosures are already increasing. This is the end result of all this news. As banks tighten their credit standards, people with problems loans will be less able to refinance their loans. This will more than likely lead to an increase in foreclosures.