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Banks profit from low interest rates { July 12 2005 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/content/article/2005/07/12/AR2005071200942.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2005/07/12/AR2005071200942.html
Bank profits may benefit from home loans
By Aleksandrs Rozens
Reuters
Tuesday, July 12, 2005; 3:32 PM
NEW YORK (Reuters) - Low interest rates have extended America's appetite for housing, likely boosting earnings for banks and other lenders this year, according to company and industry analysts.
The Mortgage Bankers Association on Tuesday revised its outlook for 2005 lending and predicted that U.S. home sales will hit new highs for the fifth consecutive year.
Expectations that demand for home loans will be sustained prompted Richard Bove, bank analyst at Punk, Ziegel & Co., to raise investment ratings for three U.S. banks -- Atlanta, Georgia-based SunTrust Banks Inc. ; First Horizon National Corp. of Memphis, Tennessee; and Birmingham, Alabama-based Regions Financial Corp. .
"We haven't seen sustained low interest rates for such a long period of time," said Buchi Ramagopal, director of financial research at Freddie Mac , a leading source of mortgage finance in the U.S. He added: "This has allowed people opportunity to trade up and be first-time home buyers."
Bove's ratings for SunTrust and First Horizon were upgraded to "buy" from "market perform," while Regions was upgraded to "market perform" from "sell."
He expects First Horizon shares to rise to $51, up from $44.46 on Tuesday and $42.58 at the beginning of 2005. Bove also sees SunTrust shares hitting $87, up from $74.99 on Tuesday and $71.06 at the start of the year.
Other lenders that could benefit from the mini-boom in mortgage lending include Wells Fargo & Co. and Washington Mutual Inc. , Bove said.
"Low rates probably have had a significant impact on volume, but what is uncertain is what this means for margins," said Michael Cohen, analyst at Susquehanna Financial LLP.
The margins Cohen referred to include measures like the net interest margin -- the difference between the interest rate at which a bank lends and the interest rate it pays on deposits.
The heightened mortgage lending is not just tied to home buying, according to industry participants.
Some of the stepped-up mortgage lending business comes as consumers refinance home mortgages to pay down home equity loans (HELs) and home equity lines of credit (HELOCs) that have seen their interest rates spike higher.
The U.S. Federal Reserve has raised interest rates nine times since last June, prompting banks to increase prime rates. As a result, borrowing costs on home equity loans and lines of credit, which are linked to prime rates, have risen.
Most fixed-rate home loans -- usually with terms of 15 or 30 years -- are linked to U.S. Treasury 10-year note rates. Ten-year note rates have dropped in recent weeks amid expectations that higher oil prices could slow the U.S. economy and that the Fed could hold off from further rate hikes. "Month after month, people have been seeing higher payments on their home equity loans because the Fed keeps raising rates," said Bove. "They are up 2.25 percent over the last year."
According to Bove, the benefits of the stepped-up activity within mortgage finance likely will show up later this year.
"Banks will still make pretty good profits on this in the third and fourth quarters," said Bove.
Shares of Regions Financial rose 0.6 percent, to $35.08 each, while SunTrust's stock was up 0.4 percent to $74.99 in trading on the New York Stock Exchange. Shares of First Horizon were up 2.2 percent, at $44.46, also on the NYSE.
© 2005 Reuters
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