Updating Estimates for Mortgage Repurchase Adjusting Estimates for $BAC, $JPM, $WFC and $PNC

Updating Estimates for Mortgage Repurchase
Adjusting Estimates for BAC, JPM, WFC and PNC

• Mortgage Repurchase Impact — In conjunction with the report published today titled: “US Banks: Mortgage Repurchase Risk: Mkt Concerns for Bank Reps & Warranties Risk Seem Overdone” we are reducing our estimates for the mortgage repurchase reserve headwind expected to continue into 2010. In this companion note we analyze the mortgage repurchase risk in depth and estimate $20 bil of remaining mortgage repurchase reserve risk for the banking industry, and $15 bil for the 6 banks in our coverage universe.

• Bank of America — We are reducing our 1Q10 estimate by $0.05 to $0.06 to incorporate mortgage repurchase hit of ~$550 mil. We estimate a mortgage repurchase headwind of ~$2.3 bil in 2010 vs. $1.9 bil in 2009. We are also reducing our investment banking estimate due to lower volumes in the quarter. We are reducing our 2010 estimate by $0.15 to $0.50 (and 2011 by $0.05 to $2.00) to reflect mortgage repurchase costs.

•JP Morgan — We trim our 1Q10 estimate by $0.04 to $0.60 (vs consensus of $0.64) with mortgage repurchase expenses of $1-1.5 bil in 2010 (vs $1.6 bil in 2009), which we see falling to $400 mil in 2011. Given muted primary I-banking volumes and a tougher environment for equity trading YTD, we also trim our 1Q10 I-banking revenue estimates by $900 mil to $7.7 bil. We also reduce our full-year 2010 estimate by $0.10 to $2.70 (vs cons of $3.00) due mostly to mortgage repurchase costs. Our 2011 estimates remain unchanged at $5.15 (vs consensus of $4.73), and we continue to see $6.50 of normalized earnings power (adjusting for normal capital structure).

• Wells Fargo — We are reducing our 1Q10 estimate by $0.03 to $0.46 (vs. consensus of $0.41) to take into account continued mortgage repurchase costs. We estimate mortgage repurchase costs of $1-1.5 bil in 2010 vs. $930 mil in 2009. We are lowering our 2010 estimate by $0.20 to $1.80 to reflect headwinds
from mortgage repurchase (~$0.15) and NSF/overdraft regulation (incremental $0.05). We are also reducing 2011 by $0.15 to $2.70 and 2012 by $0.10 to $3.15 to reflect mortgage repurchase and NSF/overdraft impacts.

Financials Update $BAC $MS $GS $STT $XLF

· Financials Update for the week – there was some expectation that the financials, esp. the banks, would cool their rapid advance as Q1 came to an end; however, this hasn’t happened and the group has continued its very strong march higher. The banks are up ~5% on the week and are up ~29% YTD. After posting the best performance of any major group in Q1, buyers continued to allocate to the group ahead of the kick-off to earnings season. There weren’t many specific catalysts for the rally, but rather a confluence of events. There is a bit of performance anxiety in the group, as the space remains relatively underowned and gains have been so strong. The desk noted that some larger MFs are starting to increase their allocations. There were a couple of bullish articles written this week on the state of commercial real estate (focusing on multi-family and office; retail still seems to be struggling), which has helped provide a bid to the smaller regional banks (keep in mind that a lot of the CRE exposure is concentrated in the regional banks). There has been a dramatic rally in the MI/financial guarantor space, reflecting the recent mortgage mod announcements (BoA, Treasury) and general optimism around resi real estate. ABK posted earnings Thurs night and the stock saw a dramatic short squeeze on Fri (recall the co delayed its earnings a few weeks back and warned of a potential bankruptcy filing). On the regulatory front, the smaller/mid-cap regional banks are viewed as having less exposure to any new rules that may come out of Washington (the most intense focus has been on activity in investment banks).