Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Friday marks a big day for bank investors, with three of the largest U.S. lenders -- Bank of America Corp., JP Morgan Chase & Co. and Wells Fargo & Co. -- each set to report fourth-quarter earnings.

continued recovery in fixed-income trading is widely expected, as is a potential uplift in investment-banking revenue. And thanks to the prospect of a rising interest-rate environment (supported by December's rate hike), net interest margins should show their first signs of expansion -- the anticipation of which has already helped drive a more than 20 percent rally in the KBW Bank Index since Nov. 8. 

Turnaround Ahead?
A rising-rate environment bodes well for banks whose net interest margins have been under pressure
Source: Bloomberg Intelligence

One area that may not attract as much attention is mortgage banking, a business that banks have retreated from in recent years due to pricing pressure stemming from the Federal Reserve's rate policies and the influx of competitors. Analysts at Keefe, Bruyette & Woods expect mortgage originations at Bank of America, JPMorgan and Wells Fargo to have fallen by a combined 24 percent in the fourth quarter from a year earlier to $89.7 billion, while the trio's mortgage banking revenue may have slipped 14 percent to $2.5 billion. 

Yet there's an opportunity here. Higher interest rates should encourage banks to more aggressively pursue mortgage lending because it will be more lucrative. Yes, there is a flip side in that demand for loans tends decline when rates are on the rise (and many borrowers have already locked in long-term mortgages or refinanced in recent years). But even so, at least interest margins should start going the right way.

Ready to Rumble?
After peaking at a quarterly figure of nearly $9 billion in 2009 (and getting close in 2012), U.S. banks have been earning less from mortgages as low interest rates squeezed margins
Source: Bloomberg Intelligence

This should give big banks incentive to refocus here and try to claw back share from non-bank lenders such as Quicken Loans Inc., which made its mark during the refinancing wave that occurred in 2012 and 2013. The Detroit-based company founded by billionaire Dan Gilbert originated some $27 billion in mortgages during the third quarter of 2016 -- the same figure as JPMorgan and more than Bank of America, and did so by leaning on marketing and technology rather than the traditional method of bank branches. 

Step It Up
The largest lenders have ceded mortgage originations market share to non-bank lenders including Quicken Loans
Source: Bloomberg Intelligence
*Data shown includes the first three quarters of 2016

Apart from Quicken, the biggest banks are competing against upstarts such as Loandepot.com LLC, as well as mortgage specialists including PennyMac Financial Services Inc. and Freedom Mortgage Corp. -- not to mention longtime rivals like Citigroup Inc. and US Bancorp (which both report their own fourth-quarter results next week).

Making Headway
Non-banks have been successfully nibbling away at the mortgage originations business once dominated by large lenders
Source: Bloomberg Intelligence

In the wake of the financial crisis, banks have hopefully learned that any concerted push to recapture a bigger slice of the mortgage market should come with discipline, so as to avoid credit losses or falling afoul of regulators. But that still leaves a lot of ground to recapture. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net