Numbers hide revenue decline at US banks
JPMORGAN Chase and Wells Fargo, bellwethers for the banking industry, have reported record earnings, but the numbers mask troubling declines in revenue.
Revenue fell slightly at both banks, and the earnings gains came largely from cutting expenses and related measures.
JPMorgan said on Friday it had put away less to cover potential lawsuits and released some of the money set aside for bad loans. Wells Fargo cut back on office space and branches.
The results show that in an era of sluggish loan demand and more state regulations, banks must stay lean if they want to boost earnings. The industry has come a long way since the panic of the financial crisis, but the pattern it has settled into is one of cutting expenses and maintaining revenue rather than turbocharged growth.
For both banks, analysts homed in on a slowdown in the mortgage business. For the past several quarters, the banks have enjoyed a boom in mortgage refinancings as homeowners lined up to take advantage of low interest rates. The pace appears to be stalling.
At JPMorgan, mortgage applications fell about 8% over the quarter to $60.5m.
They were also down about 8% at Wells — to $140m. Compared with a year earlier, applications at JPMorgan were up just 1%. For Wells, however, applications were down 25%.
Standards for getting a mortgage are still tight. Some homeowners might not qualify for a refinancing, because of changes to their personal finances, and others might not be able to afford one. When homeowners refinance their mortgage, they get a lower interest rate that helps them save money over time. But getting a refinanced loan also costs money upfront, in fees to the bank.
Analysts questioned whether the homeowners most motivated or most qualified to refinance already have — “the low-hanging fruit”, as FBR Capital Markets analyst Paul Miller said.
Tim Sloan, chief
financial officer at Wells Fargo, estimated that 25% to 30% of Wells’ mortgage borrowers were still eligible for a refinancing.
“It’s a function of what their finances look like,” Mr Sloan said. “Maybe they’ve switched jobs and haven’t had the opportunity.”
Other people might not be aware of what is available.
The government is trying to raise that awareness. The federal government last Thursday announced it would extend the four-year-old home affordable refinance programme, and launch a national campaign to promote it. The programme aims to encourage struggling borrowers to refinance loans at a lower rate.
About 2.2-million people have refinanced their mortgages through the programme since April 2009. Officials had hoped that at least 4-million borrowers would participate. It is unclear what effect the programme might have: the big banks are already reaching out to customers who would qualify for a refinance.
“Who knows how much it will help?” said Guy Cecala, publisher of Inside Mortgage Finance.
The mortgage business is also less profitable than it has been in recent quarters. More lenders are competing for mortgage business, meaning the banks have to offer lower interest rates to home buyers. The banks also make money by packaging their mortgages into securities and selling them to investors, and those investors are demanding higher returns.
Wells and JPMorgan are the country’s two biggest mortgage lenders. Wells controls nearly 28% of the US market and JPMorgan controls more than 10%, according to Inside Mortgage Finance.
JPMorgan Chase’s profit jumped 34% from a year earlier, while revenue slipped 3%. The investment bank underwrote more bond offerings.
The private bank, which caters to wealthy individuals, brought in more revenue. Profit and revenue slipped in retail banking, which includes the mortgage unit.
JPMorgan slashed expenses by 16% and cut nearly 5,300 jobs, or about 2%, of its work force. It has said that it is trimming jobs in the unit that deals with troubled mortgages, as fewer homeowners are behind on their loans. It is also installing technology in branches that can replace workers.
In the retail bank, JPMorgan released some of the funds it had set aside to deal with potential bad loans. It added less to its reserve for legal expenses, which boosted results, though bank officials declined to predict a trend.
There are “a lot of things coming our way,” said JPMorgan CEO Jamie Dimon, whose bank is still dealing with the fallout of a surprise $6bn trading loss last year, “and we’ll have to reserve appropriately as they come in”. The bank made $6.1bn in the first quarter, after stripping out payments to preferred shareholders, up from $4.6bn a year ago.
On a per-share basis, that amounted to $1.59, blowing away the $1.39 expected by analysts polled by FactSet. Revenue totalled $25.8bn. That beat analysts’ estimates, but was down from $26.8bn a year ago.
Wells Fargo profit jumped 23% from a year earlier, while revenue slipped 2%. The wealth management unit increased both revenue and profit. In the retail bank, which includes mortgages, profit was up but revenue fell.
Wells trimmed expenses 5%, to $12.4bn. It is cutting down on office space and shuttering bank branches, and its own borrowing costs were down. Over the year, the bank added about 9,400 jobs, an increase of 4%. Last year, it was the only megabank to add jobs instead of cutting them.
Wells earned $4.9bn in the first quarter, after stripping out payments to preferred shareholders, up from $4bn a year ago. On a per-share basis, earnings were 92c, beating the 89c forecast by Wall Street. Sapa-AP