Mortgages could be reason behind increased US bank earnings

US bank earnings have been supported by mortgage lending in the first quarter as lower rates led to an increase in applications to refinance home loans. This is good news for the sector that has struggled with weak growth for the past many quarters.

There were probably other factors offering boost for the biggest US banks in the first quarter, together with higher underwriting revenue and bond trading. The big banks begin reporting for the quarter next week. On Tuesday, Wells Fargo & Co and JPMorgan Chase & Co started reporting.

It is anticipated that most of the banks will post comparatively big profit increases, exclusive of one-time items, as per average analyst forecasts from Thomson Reuters I/B/E/S following a year-ago period. During that period, results were not good because of weak mortgage and trading revenues.

According to analysts, mortgages could be among the most striking shifts for banks. According to Paul Miller, an equity research analyst at FBR Capital Markets, "The numbers are very strong. Mortgage banking revenue will probably be greater than people are expecting”.

Declining borrowing costs led to increased strength in the balance sheets. According to Freddie Mac's weekly mortgage market survey, the average 30-year mortgage rate dropped as low as 3.63% in the first quarter of 2015 and hit its lowest level since May 2013. It differs from last year's first quarter, when rates were edging higher, cutting into volume.

Interest rates decreased since slower growth in Asia and Europe made investors to acquire US debt. Wells Fargo, which is the biggest mortgage lender with 14% of 2014 loans, and has also cut costs, could get most benefit from any rebound in new loans.