Christina Rexrode and Steve Rothwell New York
JPMorgan Chase and Wells Fargo, bellwethers for the banking industry, reported record earnings on Friday, but those numbers masked troubling declines in revenue.
Revenue fell slightly at both banks, and the earnings gains came largely from slashing expenses and related measures. JPMorgan retained way less to cover potential lawsuits and released some cash 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 increased government 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. That pace now appears to be stalling, if not slowing.
At JPMorgan, mortgage applications fell about 8 percent over the quarter to $60.5 million (R540m). They also fell 8 percent to $140m at Wells Fargo. Compared with a year earlier, applications at JPMorgan were up just 1 percent. For Wells Fargo, however, applications were down 25 percent.
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, which helps them save money over time. But getting a refinanced loan also costs money upfront in fees to the bank.
Analysts questioned whether those homeowners who were most motivated or most qualified to refinance had done so – “the low-hanging fruit”, as FBR Capital Markets analyst Paul Miller put it.
Wells Fargo chief financial officer Tim Sloan estimated that 25 percent to 30 percent of its mortgage borrowers were still eligible for a refinancing.
“It’s a function of what their finances look like.
“Maybe they’ve switched jobs and haven’t had the opportunity,” he said.
Other people might not be aware of what was available.
The US government is trying to raise awareness. The federal government announced on Thursday that it would extend the four-year-old Home Affordable Refinance Program (Harp), 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 not clear what effect Harp may have. The big banks are already reaching out to their customers who would qualify for a refinance.
“Who knows how much it will really help?” said Guy Cecala, the 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 mortgages into securities and selling them to investors, and those investors are demanding higher returns.
Wells Fargo and JPMorgan are the two biggest US mortgage lenders. Wells Fargo controls nearly 28 percent of the market and JPMorgan controls more than 10 percent, according to Inside Mortgage Finance. – Sapa-AP