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Analysts up bank earnings on QE3

October 2, 2012: 2:03 PM ET

Bernanke boost, though, could be short-lived.

Bernanke

Fed Chairman Ben Bernanke

Fortune -- Will Bernanke save bonuses? Not likely.

A number of analysts have recently upped their third quarter earnings estimates for the banks based on QE3. In mid-September, Ben Bernanke announced that the Federal Reserve will buy $40 billion worth of mortgage bonds a month until the economy recovers. Mortgage spreads, the amount banks make on home loans, have widened 0.16% since QE3 was announced, and are now at 1.6%, or roughly three times as large as they have been on average for the past decade.

But some analysts may be getting carried away with their QE3 lovin'. When Bernanke announced the bond buying program there were only 12 working days left in the quarter. Yet, Richard Staite, an analyst at Atlantic Equities, estimates that QE3 will goose Wells Fargo's (WFC) bottom line by $105 million in the third quarter alone, or nearly $9 million per QE3 working day.

MORE: Shelia Bair takes on Bernanke

David Konrad, an analyst at Keefe Bruyette and Woods, recently upgraded his rating of Citigroup (C) to an outperform. His No. 1 reason: QE3. JPMorgan's Vivek Juneja says he believes QE3 will boost demand for mortgages in the fourth quarter.

There has been some debate about whether the Fed's bond buying programs will end up being a boon or a bust for the banks. While QE3 has boosted the banks' mortgage business, overall the Fed's efforts to keep interest rates low could hurt elsewhere. Mortgages are often sold off to investors or to Fannie Mae or Freddie Mac. As a result, banks are able to book an immediate profit. But in many other areas, banks often hold onto the loans they make. Lower interest rates mean they will make less money on every loan, perhaps for years. The longer interest rate remain low, the more high interest rate loans disappear. Juneja says he expects long-term net interest margins, which measures the profits banks make on all their loans, not just mortgages, to decline more than expected because of QE3.

MORE: Fed's buying spree may not save the jobless

So the answer has to do with short-term versus long-term. In the short-term, the boost banks are getting from QE3 in their mortgage businesses is greater than the drag on profits in other lending businesses. The question is when will that flip.

The answer could be pretty quick. Atlantic Equities' Staite, for instance, estimates Wells Fargo's Bernanke boost is likely to dissipate to just $150 million for the entire fourth quarter, which translates into $1.6 million per working day. Still positive, but dropping quickly.

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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