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KBRA: Q3 2014 Large Bank Earnings Preview: In Search of Normalcy

Below are some excerpts from my latest large bank earnings report, "Q3 2014 Large Bank Earnings Preview: In Search of Normalcy." Suffice to say that the best performer among the top-five US banks is U.S. Bancorp (NYSE:USB) and by a wide margin.  We believe that small regional and community banks are the only part of the banking industry creating any value at this point.  All of KBRA's research, ratings reports and methodologies are avaiable free of charge on, but our beloved regulators require that users register.



In Search of Normalcy

The banking sector has been buffeted by a number of adverse factors over the past several
months, chief among them are notable costs related to regulatory actions that have caused
three of the top five banks to report earnings which have been badly distorted by
“extraordinary” expenses - costs which seem to reoccur at remarkably regular intervals.
Investors are rightly concerned with the woes from the largest financial institutions - which is
one of the reasons why astute asset managers and financial advisors have turned their
attention toward other industry sectors for the past several years. KBRA believes that the
only part of the U.S. banking industry that is currently creating shareholder value are the
smaller regional banks and community banks.

Another big factor that has dampened enthusiasm for large cap banks is the doldrums
affecting the mortgage sector, which has seen housing sales and loan volumes fall to some of
the lowest levels in more than a decade. Despite a rush by some banks to take advantage of
gain-on-sale opportunities at the end of the second quarter, the lack of new mortgage
origination volumes in the housing sector was also a decided negative for earnings in the
second quarter.

As the FDIC’s Quarterly Banking Profile noted, “net operating revenue (the sum of net interest
income and total noninterest income) [in Q2 2014] was $1.5 billion (0.9 percent) lower than
in second quarter 2013, as a decline in noninterest income from mortgage sales, securitization
and servicing outweighed an increase in net interest income.” In terms of anecdotal indicators,
KBRA notes that banks and non-banks alike continue to reduce staffing and expenditures
focused on residential mortgage originations and servicing amidst a growing trend towards
consolidation. Large banks as a group are slowly exiting the residential mortgage space.
Meanwhile, sales of mortgage originators and servicers are increasing as regional banks and
non-bank players seek to achieve scale and larger capital bases.