An improving housing market and stronger consumer balance sheets helped two American banking giants beat second-quarter expectations Friday, striking an optimistic tone for other financials due this coming week.
JPMorgan Chase (JPM) revealed that losses from its botched hedges climbed to $5.8 billion. Wells Fargo (WFC) reported a hit related to Thursday's $175 million mortgage discrimination settlement with the Justice Department.
But both banks said the economy seemed to be improving.
"The underpinnings of the American economy aren't that bad," JPMorgan CEO Jamie Dimon said during a conference call with analysts. "Corporate America, the middle-market companies, small businesses are OK.
Wells Fargo, the No. 1 U.S. home lender, touted record mortgage applications on low interest rates.
"Mortgage volumes have been much stronger than anyone expected a year ago, or even three months ago," CFO Timothy Sloan said on Wells' call.
Shares of JPMorgan rallied 6% to 36.07. Wells rose 3.2% to 33.91, near its April multiyear high.
JPMorgan, the No. 1 U.S. bank, earned $1.21 a share vs. $1.27 a year earlier, smashing forecasts for 73 cents. Revenue slid 16% to $22.89 billion, but beat views.
A disastrous package of hedges by a London office cost JPMorgan $4.4 billion in Q2 alone, or 69 cents per share. The bank also moved $459 million in trading losses to Q1. All told, the synthetic credit derivatives mess has cost $5.8 billion, far more than the $2 billion initial estimate.
Dimon said a board probe continues, but that the U.K. unit's management is gone without severance and two years of pay clawed back. Others — including Dimon — could have pay taken back after the investigations.
"We are not proud of this moment, but we are proud of our company," he said.
JPMorgan reported stronger consumer and commercial banking businesses, though revenue and profits fell in investment banking and asset management.
Evercore Partners analyst Andrew Marquardt called the results "noisy, as expected." But in a client note, he said the bank appeared to be moving past the embarrassing trading losses.
Dimon said he wants JPMorgan to buy back shares, but doesn't see that happening until at least Q4.
Wells Fargo reported EPS rose 17% to 82 cents, a penny over analyst views. The No. 4 U.S. bank, which turned 160 years old Friday, boosted profit by releasing $400 million from loan loss reserves as delinquencies kept falling. Revenue rose 4% to $21.29 billion, slightly below forecasts.
Total loans rose $8.7 billion vs. Q1 to $775.2 billion, in part on its acquisitions of portfolios from BNP Paribas and WestLB.
Operating losses grew 22% to $524 million, including litigation costs tied to the DoJ settlement.
The bank also grew its reserves to $669 million from $430 million in Q1 to cover possible requests by government-backed entities to buy back soured mortgages.
Evercore's Marquardt called Wells' results "strong but slight ly disappointing," in a client note. He said adjusted earnings were actually below Street estimates.
Wells and JPMorgan are generally seen as among the best-run big banks. Their solid results offer hope for earnings this week from Bank of America (BAC), Citigroup (NYSE:C) and Goldman Sachs (GS).
"Banks are limping back to their feet, growing earnings and performing well," Lawrence Creatura, portfolio manager at Federated Clover Investment Advisors, told IBD.
