Long toxic, mortgages now seen boosting bank results

by 01 Oct 2012

(Reuters) - One of the few businesses working well for the biggest banks these days is the same one that got them in trouble just five years ago: mortgages.

Wells Fargo & Co and JPMorgan Chase & Co are both expected to post more than $4.5 billion in profits for the third quarter, an increase of more than 15 percent from last year, according to Thomson Reuters I/B/E/S.

Other businesses at big banks will likely benefit from the mini-mortgage boom. Fixed-income trading revenue will likely rise at Goldman Sachs Group Inc and other investment banks, thanks in part to more trading in mortgage-backed securities.

A booming mortgage business will help make up for a challenging environment that includes low interest rates squeezing lending profits and slow merger activity pressing earnings from investment banking. Analysts said banks may announce new rounds of cost cutting.

While banks are making new mortgages, the home loan business is still tough. Lenders have millions of foreclosures to process, and all the current refinancing will translate into lower income from mortgage securities they choose to hold.

Legal settlements stemming from the housing bubble and financial crisis are still weighing on results. Bank of America Corp (BAC.N) said on Friday it will pay $2.43 billion to settle a class-action lawsuit by investors who claimed the bank lied to them when it was acquiring Merrill Lynch. With the settlement, the bank will likely post a quarterly loss.

Many lenders scaled back mortgage operations after the housing crash, which turned into a financial crisis that cost banks trillions of dollars globally.

But for banks that stuck with the home lending business, such as Wells Fargo, JPMorgan, and U.S. Bancorp, the fees generated from making mortgages will be a big boon in the near term, analysts said.

"They're the ones that are going to be the winners," said Paul Miller, an analyst at FBR Capital Markets. "We think the refi boom lasts four to five more quarters."

Wells Fargo, the No. 4 U.S. bank by assets, and JPMorgan, the biggest, are scheduled to release third-quarter results on October 12 - the first major financial institutions to do so.

The remaining four of the six biggest banks - Bank of America, Citigroup Inc, Goldman, and Morgan Stanley are due to report the following week.

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