Futures slip, bank earnings ahead, Powell to speak - what’s moving markets
On Tuesday, Keefe, Bruyette & Woods provided insights into the mortgage industry, focusing on the performance of PennyMac Financial Services, Inc. (NYSE:PFSI) and Rithm Capital Corp. (NYSE:RITM) after reviewing the 1Q25 Mortgage Bankers Association (MBA) Profitability Survey. The survey revealed that while gross margins in the mortgage sector showed improvement quarter-over-quarter, pre-tax margins declined and remained in negative territory.
The survey indicated that total production revenue, also known as the gross gain-on-sale margin, was 373 basis points (bp) in the first quarter of 2025, a rise from 339 bp in the fourth quarter of 2024 and a slight increase from 371 bp in the first quarter of 2024. The gross margin saw an increase of 34 bp from the previous quarter, but due to a 37 bp rise in expenses, the pre-tax margin decreased by 3 bp to -7 bp. PFSI maintains a robust gross profit margin of 91.5%, though InvestingPro data shows the company is currently experiencing some cash flow challenges, with analysts expecting a 24% revenue decline this year. Analysts noted that the first quarter is typically weaker seasonally, so the sequential decline was anticipated.
Historically, since the start of the survey in the third quarter of 2008, the profit margin has averaged approximately 41 bp. Looking forward to the second quarter of 2025, Keefe analysts expect both gross and net margins to benefit from higher volumes driven by seasonal factors.
In the current subdued volume environment, Keefe, Bruyette & Woods underscored that companies with heavy servicing portfolios like PFSI and RITM are well-positioned within their coverage universe, maintaining an ’Outperform’ rating for both firms. Additionally, they have sustained their ’Outperform’ rating on UWM Holdings Corporation (NYSE:UWMC), suggesting that recent share price weaknesses have presented a more favorable risk/reward situation.
In other recent news, PennyMac Financial Services Inc. reported disappointing first-quarter 2025 earnings, with earnings per share (EPS) at $1.42, falling short of the anticipated $2.78. Revenue also missed expectations, totaling $430.9 million against a forecast of $522.21 million. Despite the earnings miss, PennyMac remains focused on strategic growth, emphasizing operational efficiencies and investments in artificial intelligence. Additionally, PennyMac announced plans to issue $650 million in Senior Notes due 2032, with the proceeds intended to redeem existing notes and fund general corporate purposes. The new debt issuance will be offered to qualified institutional buyers through a private placement, not registered under U.S. securities laws. PennyMac continues to assert its position as a leading mortgage loan producer and servicer, handling loans with an unpaid principal balance of $680 billion. The company also highlighted its strategic partnership with Team USA and the LA 2028 Olympic and Paralympic Games, aiming to boost its brand presence and market share. Investors and analysts are closely monitoring these developments, particularly the impact of the earnings miss on investor confidence and market share in the correspondent lending sector.
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