Q1 2015 U.S. Banking Review: Outstanding Mortgage Portfolio

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The first quarter of the year saw a notable improvement in mortgage origination volumes – something we pointed out in our article last month. But that did not do much to counter the steady decline in outstanding mortgage loans that the country’s commercial banks have witnessed since early 2010. This is primarily because mortgage loans have been repaid or charged-off at a faster rate over this period than they have been replenished through fresh originations. The fact that loan repayments are highest over the first quarter of a year only made things worse this time around.

It should be noted that U.S. banks have seen steady growth in their total loan portfolios over the last few years thanks to growing confidence in the economy and record low interest rates. This makes the mortgage industry stand out as a loan category that has shrunk over this period. In this article, we detail the trends in the residential mortgage portfolio of the country’s largest commercial banks – JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB) – over the last three years, and compare the proportion of mortgage loans in their overall loan portfolios.

See the full Trefis analysis for Wells FargoJPMorganU.S. BancorpBank of AmericaCitigroup

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The table below highlights the proportion of loans held by all U.S. commercial loans at three specific periods: in October 2008 (when loan sizes were at their peak before the recession), in February 2010 (when loans were at the lowest level since the recession), and in April 2015 (the latest period for which data is available). The table uses historical data compiled by the Federal Reserve. [1] The figures in brackets are the percentage of the total loans falling in a particular category.

(in $ billions) Oct 2008 Feb 2010 Apr 2015
Residential Mortgages 2,103 (28.9%) 2,099 (32.1%) 2,050 (25.0%)
Commercial & Industrial 1,5856 (21.8%) 1,223 (18.7%) 1,856 (22.7%)
Commercial Real Estate 1,721 (23.6%) 1,620 (24.8%) 1,655 (20.2%)
Credit Card 374 (5.1%) 318 (4.9%) 625 (7.6%)
Retail 486 (6.7%) 494 (7.6%) 587 (7.2%)
Other 1,017 (14.0%) 776 (11.9%) 1,414 (17.3%)
Total 7,287 6,530 8,187

It should be noted that credit card loans include unsecured revolving credit, while retail loans include auto loans, student loans and other secured consumer loans. Other loans are made up of loans to financial institutions as well as the lending of federal funds and reverse repurchase agreements. As can be seen clearly, residential mortgages have inched lower over the years, as mortgage portfolios suffered significant charge-offs over the 2009-2011 period. Also, while mortgage originations reached peak levels in 2012, the activity was largely targeted towards refinancing and not new mortgage originations.

The slowing mortgage activity over recent years stands out in particular in the loan portfolio of individual banks. The table below captures the average size of the mortgage portfolio for each of the country’s largest banks. The data has been compiled using figures reported by individual banks as a part of their quarterly announcements.

(in $ billions) Q1’12 Q2’12 Q3’12 Q4’12 Q1’13 Q2’13 Q3’13 Q4’13 Q1’14 Q2’14 Q3’14 Q4’14 Q1’15
Wells Fargo 314.4 312.1 313.7 321.5 326.1 323.9 322.9 324.0 324.5 323.2 323.7 325.0 324.7
Bank of America 395.6 386.2 377.6 366.8 364.6 359.0 354.5 349.4 340.3 334.1 323.9 310.0 299.9
JPMorgan 225.1 218.2 211.3 204.5 199.9 195.0 191.4 189.0 186.8 185.5 184.7 185.4 190.3
Citigroup 189.3 183.2 181.7 178.7 174.3 165.8 161.9 162.2 161.4 160.3 158.7 152.2 145.9
U.S. Bancorp 59.9 60.7 61.9 63.5 64.8 65.9 67.7 68.9 69.4 69.4 69.8 69.7 68.8

The first thing that stands out here is that the only two banks that have seen an increase in their mortgage portfolio are the ones that have actively focused on the business since the economic downturn – Wells Fargo and U.S. Bancorp. While both Bank of America and Citigroup continue to run off more home loans than what they hand out each quarter, JPMorgan saw an increase in its mortgage portfolio for the second consecutive quarter in Q1 2015 – indicating that the country’s largest bank has cleared its balance sheet of poor legacy mortgages.

With an average of $325 billion in outstanding mortgages for the quarter, Wells Fargo has the largest mortgage portfolio among all U.S. banks. The largest bank in terms of market capitalization passed Bank of America in this regard over the second half of 2014, and the margin is only expected to increase in the future. Despite having a significantly smaller loan portfolio compared to its diversified peers on the list here, U.S. Bancorp has done extremely well to match Wells Fargo’s loan growth in absolute terms over this period.

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Notes:
  1. Assets and Liabilities of Commercial Banks in the U.S. (H.8), Federal Reserve Website []