JP Morgan (JPM) and Wells Fargo (WFC) reported earnings this morning, coming in more or less in line. The Street's reaction is muted in mid-day trading on Friday, but Chris Whalen, executive vice president and managing director of Carrington Investment Services, says there's turmoil under the surface as Wall Street continues to redefine itself in the wake of the financial crisis.
"What investors have to get their heads around is what is the business model for these banks are going to look like a year from now," Whalen says in the attached video.
The root of the problem is in the mortgage business, which Whalen thinks peaked in Q4 of last year. With lingering suits, Basel III requirements and Dodd-Frank all swirling around the miasma of the banking system, financial institutions may not be certain what they're going to look like in the intermediate term, but they aren't about to test their lending boundaries.
Loan originations have seen sizable improvements of late, but there's only so many Americans both looking to buy a new home and able to secure the loans at the headline rates. "If you're below a 700 FICO you can't get a mortgage today," says Whalen.
Unfortunately a relatively low percentage of Americans fit the bill, leaving both the banks and would-be buyers in the lurch. When banks can't lend to nearly 40% of those in the market, Whalen says a pick-up in housing isn't sustainable.
In Whalen's view, the endgame is the market forcing a break-up of the big banks. With no predictability of their businesses and the ability to cross-sell banking products obsolete, Wall Street analysts and investors are going to run out the faith required to trust the banks to continue to improve profitability levels.
It takes time but eventually earnings and confidence in the sustainability of a business model matter for companies. Even banks. Until investors know what these companies are going to become, the stocks will continue to be driven largely by faith.