Canaccord Genuity North American Portfolio Strategist & Quantitative Analyst Martin Roberge highlights that after U.S. homebuilders, here come the U.S. banks! With the recent emergence of a U.S. housing recovery, Roberge highlights that the price and earnings cycle of U.S. homebuilders lead that of U.S. banks by about a year.
The lagged relationship is consistent with housing fundamentals taking longer to filter through banks’ balance sheets. In other words, unsold home inventories must first be depleted before banks originate new mortgages. The good news is that real estate lending has the potential to add a sizeable contribution to banks’ earnings in 2013.
Indeed, for a second quarter in a row, real estate lending is up year-over-year, and the NAHB Housing Index points to stronger mortgage lending activity for the next few months. Also, with yields on mortgage-backed securities falling like a rock (~3%) after QE3, banks are currently originating loans at much higher rates (~3.4%).
Banks can then turn to the Fed to dump their repackaged loans and thus pocket juicy spreads. All things considered, calling for U.S. banks in 2013 to mimic the price and earnings performance of U.S. homebuilders in 2012 is not a far-fetched possibility, in Roberge's view.
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Wells Fargo (WFC : NYSE : US$34.47), Net Change: 0.74, % Change: 2.19%, Volume: 34,479,230