JPMorgan Chase and Wells Fargo’s earnings reflects uneven economic growth

A one-two punch from slumps in fixed income and mortgages offset progress Morgan had made in cutting expenses - a concern for investors amid the lawsuits and investigations plaguing the bank. (Reuters)
April 11

Earnings at two of the nation’s largest banks illustrate a continued slowdown on Wall Street and Main Street, which casts a shadow on economic growth prospects.

On Friday, JPMorgan Chase reported that its first-quarter earnings tumbled nearly 20 percent, landing at $4.8 billion, because of lackluster investment trading and mortgage revenue. Similarly, Wells Fargo reported a slump in mortgage originations, although lower loan losses and reduced expenses bolstered the bank’s profit by 14 percent, to $5.9 billion.

Rising interest rates and home prices have kept many Americans out of the housing market, driving refinance volumes and new-home purchases down for the past few quarters.

The continuation of that trend was evident in the ho-hum originations at the nation’s largest mortgage lender, Wells Fargo. The bank, widely considered a bellwether for the U.S. housing market, approved $36 billion in mortgages in the first three months of the year, down about 28 percent from the prior quarter.

Nevertheless, Wells Fargo chief executive John G. Stumpf was optimistic on a call with analysts Friday, saying, “The housing recovery remains on track and should benefit from the spring buying season.”

It is early in the season, but higher mortgage rates and prices have made houses too expensive for first-time buyers, analysts say. Meanwhile, applications for refinancing in the week ended April 4 dropped to the lowest level since July 2009, according to the Mortgage Bankers Association.

On a call with analysts, JPMorgan chief executive Jamie Dimon said that market conditions favor borrowers who are buying high-priced homes or those with credit strong enough to get a government-backed mortgage.

“If you are jumbo you get loans, if you are GSE [a government-sponsored enterprise] you get loans, but almost all the other stuff in between . . . a lot of people are being tougher than is required . . . because the reps and warranties,” he said. “I don’t know when that’s going to go away. It’s not getting worse. It’s just kind of sitting there and probably holding back the purchase market.”

Mortgage originations at the bank were $17 billion, down 27 percent from the fourth quarter, and 68 percent from a year ago. Early this year, JPMorgan announced plans to cut 6,000 workers in its home-loan unit amid a slowdown in refinancing requests.

Diminished mortgage lending at JPMorgan was rivaled by the slump in the firm’s investment banking business. Revenue from fixed-income trading tumbled 21 percent, to $3.8 billion, in the first quarter because of lower levels of client activity.

“There was an expectation that [bond] rates would continue to drift up. Buyers were reticent to add fixed income if rates were going to go up, so any bonds they bought would go down in value,” said Jeff Davis, a managing director at advisory firm Mercer Capital. “But that’s not what happened. ”

Wall Street banks have contended with deceleration in trading activity and bond underwriting for several months. Going into this earnings season, analysts predicted that new rules designed to make derivatives trading more transparent and higher capital requirements would also hamper returns.

Wells Fargo is far less engaged in fixed-income trading and other investment plays that are being squeezed by new regulation. The bank is far more reliant on traditional consumer lending, which underscored its strong results in the first quarter.

Wells Fargo posted $3.8 billion in profit in its community banking unit, up 19 percent from the previous quarter and 31 percent from a year earlier. That business houses the bank’s auto-lending line, which recorded $7.8 billion in originations, up 15 percent year over year.

Auto lending was also a bright spot for JPMorgan, with $6.7 billion in originations, up 3 percent from the prior year. Credit card sales also climbed 10 percent from the previous year to $104.5 billion.

The strength of consumer banking for JPMorgan and Wells Fargo reflects improving consumer confidence, analysts say, which bodes well for continued loan growth in the coming quarters.

“I’m optimistic about future economic growth because consumers and businesses have continued to improve their financial conditions,” Stumpf said. “Households have reduced their leverage to the lowest level since 2001, and the burden of their financial obligations is lower than at any time since the mid-1980s.”

Another key area of growth for both firms has been commercial real estate. Lending to developers helped fuel the growth of Wells Fargo’s overall loan portfolio to $826.4 billion, up $4.2 billion from a year ago. And for JPMorgan, the business experienced 15 percent growth during the first three months of the year.

“Commercial real estate is a business that uses a lot of debt, and rates are very low,” Davis said. “I don’t think that you are going to see loan growth explode. It’s going to be a gradual grind to better numbers.”

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