SNL Financial's Latest Report Finds NIM, Revenue and Regulatory Pressures Persist in Q3 for Big Banks

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According to research firm, SNL Financial, although large banks have come a long way over the last few years in terms of capital position and asset quality, Q3 earnings will likely reflect many of the existing obstacles banks still face like waning refi demand, slowed consumer spending, low interest rates on the short end of the curve, and regulatory burdens.

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And that's the real meat and potatoes of the economy that we're talking about here. If you don't have increasing consumer spending or strong business investment, then things are going to be soft.

Wall Street anticipates that the nation's banks and thrifts will collectively report modest third-quarter earnings, as many continue cost-cutting efforts and pocket savings from lower credit losses to offset pressure on net interest margins and revenue streams.

"While the banking industry has come a long way toward healing itself over the past couple of years by strengthening capital positions and credit quality, the general operating environment for banks remained challenging in [the third quarter] on several fronts," a team of analysts from Sandler O'Neill & Partners LP wrote in a report previewing the upcoming earnings season, which gets under way Oct. 11. Both Wells Fargo & Co. and JPMorgan Chase & Co. report that day.

An SNL analysis of analysts' average estimates for 19 major U.S. banking companies shows that the Street expects nearly three-fourths of them to report third-quarter net income that is down from the previous quarter. Revenue, too, is expected to be down at a majority of those companies.

Scott Brown, chief economist at Raymond James, told SNL that it will not surprise him to hear banks report weak loan demand during earnings season.

He said consumer spending slowed during the summer months, and auto sales, a recent source of strength for the economy, were down in September. And businesses, he said, remain skittish about both major investments and hiring, keeping demand for credit in check.

"And that's the real meat and potatoes of the economy that we're talking about here," he said. "If you don't have increasing consumer spending or strong business investment, then things are going to be soft."

He added that the partial federal government shutdown, which devolved from partisan fighting over the nation's debt ceiling and a new health care policy that went into effect in October, could cause more problems. If prolonged, government workers forgoing paychecks will curtail spending notably, as will various contract workers whose business is tied to the government, Brown said.

"The longer this lasts, the bigger the drag on the whole economy" and, by extension, banks' outlook on loan demand, he said.

Analysts also say that noninterest income likely will take a hit at banks big in mortgages — notably including home lending giant Wells — as the fees lenders generate off mortgage refinancing are dwindling. Refi demand has waned in recent months against a rise in the 10-year Treasury yield that pushed up long-term rates and made 30-year mortgages less affordable.

As Brett Rabatin, an analyst at Sterne Agee & Leach Inc., put it to SNL recently: "Everyone's worried about mortgages."

To read on, visit http://www.snl.com/InteractiveX/Article.aspx?cdid=A-25309484-10547.

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Christina Twomey
SNL Financial
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