1---Weak Trading, Mortgage Slump, Legal Costs to Cut Results at Banks, WSJ
Analysts Rush to Reduce Estimates
New troubles are piling up for U.S. banks as they prepare to release third-quarter results amid warnings of weak trading revenue, a sharp decline in mortgage-refinancing activity and rising legal costs....
I haven't seen morale this bad since the Titanic," said Richard Stein, a senior recruiter at Caldwell Partners CWL.T -3.41% who specializes in financial services.
The effects of slowing mortgage demand, weak trading revenue and higher legal costs are being felt far and wide.
There's no opportunity to make any money right now," he said. "Nothing is happening."
An early warning sign came on Sept. 17, when investment bank Jefferies Group LLC reported an 83% drop in net income for its third-quarter, which ends a month earlier than at other banks. Analysts have since cut profit estimates at Morgan Stanley, Goldman Sachs and Citigroup, citing the trading slowdown....
Nowhere are banks hurting more than in mortgages. Banks long have braced for a slowdown, but the spike in interest rates this summer brought a yearlong boom to an abrupt end.
"It's been brutal," said Michael Menatian, a mortgage banker in West Hartford, Conn. "We were flat-out busy until May. Once rates went up, things went completely dead." He said he closed around $4 million in loans every month through June, and about $1.5 million a month since then.
Wells Fargo, the nation's largest mortgage company by loan value, last month told investors it expects mortgage originations to drop nearly 30% in the third quarter to roughly $80 billion, down from $112 billion in the second quarter. J.P. Morgan, meanwhile, has said it expects to lose money on its mortgage-origination business in the second half of the year, and that mortgage originations are on pace to drop as much as 40% from the first half of the year.
2---Carlyle Cuts Apartment Holdings After Rent Growth Slows, Bloomberg
Carlyle Group LP (CG), the private-equity firm with more than a third of its $2.3 billion U.S. real estate fund in apartments, is reducing holdings of multifamily housing as rent growth slows from a post-recession surge.
The company is considering apartment sales as rising construction reduces multifamily shortages and price gains for rental properties make them less attractive for private-equity firms that seek returns of 20 percent or more, said Robert Stuckey, the Washington-based firm’s head of U.S. real estate investing. Carlyle has invested or committed about $800 million of equity in 61 multifamily properties since the start of 2011, he said...
About one-third of the firm’s real estate investments are in properties that are more directly affected by the economy, such as office and retail.
“Our basic view is we’re in a low-growth environment,” Stuckey said.
3---Time to taper? Not if you look at bank loans, Reuters
The U.S. Federal Reserve decided to hold off on scaling back its bond-buying program on Wednesday, and at least one reason for its choice may have been a stubbornly weak economic indicator: bank lending.
Since the bottom of the recession just over four years ago, commercial bank loans and leases have grown 4.0 percent, one of the weakest post-recession recoveries in terms of borrowing since the 1960s, according to Paul Kasriel, the former chief economist of Northern Trust Company. For comparison, over the same period after the July 1990-March 1991 recession, loans and leases grew over four times faster.
"Given what's happening to bank credit and given that the economy isn't booming, I would say it was very wise that the Fed did not choose to cut back on its asset purchases at this point," Kasriel said in an interview.
In recent weeks, residential mortgage lending has dropped and commercial lending growth has slowed as Fed officials have talked about starting to wind down their bond buying stimulus program. That talk of "tapering" spooked bond markets, lifting long-term borrowing costs.
The Fed noted in its statement that mortgage rates have risen, and added that "the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market."
The central bank's statement underscores the narrow line the Fed must walk now between preventing asset bubbles and nurturing an economic recovery. As the Fed slows down its pace of bond buying in a program known as "Quantitative Easing III," it will cool markets that may be overheated.
But it also risks making credit harder to come by, which could hurt a recovery that by many metrics looks tepid.
Banks say they are more than happy to lend now, and that the real problem is that customers are less interested in borrowing.