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Why J.P. Morgan, Wells Fargo lukewarm earnings reports are the new norm


J.P. Morgan (JPM) met earnings expectations as long as you ignore all the legal expenses and Wells Fargo (WFC) said the mortgage business is doing just fine, albeit in a slowing way. The results were hardly inspiring but in the attached video SunAmerica’s Heather Hughes says the hyper-regulatory environment has made it hard to expect much more from the financial sector.
“It’s almost impossible for the banks to grow top line revenues,” Hughes says, comparing regulators to highway patrolmen following motorists for hundreds of miles waiting for the smallest infraction. For a bank as huge as J.P. Morgan more than $30 billion of fines and fees is a lot of money, but it’s manageable in the grand scheme of things. Suffice it to say there’s no risk of regulators taking away the banks’ license to print money anytime soon.
As for the quality of J.P. Morgan’s earnings, the less said the better. The company released $1 billion previously set aside to protect against mortgage losses. Is that a reasonable move with mortgage activity slowing? Directionally it would seem to make no sense whatsoever to remove loss reserves in a fundamentally weakening segment of your business. What J.P. Morgan did is akin to responding to a leak in your ceiling by reducing your homeowner’s insurance.
Thankfully common sense and reported earnings don’t have much to do with one another.  The only news that really mattered to the economy today was Wells Fargo saying that the mortgage business is doing just about what it would be expected to do at this point in the economic cycle.
When it comes to bank earnings on a quarterly basis, the company’s can report more or less whatever they want. There are simply too many moving parts to accurately measure the businesses from moment to moment. As the bank earnings keep rolling in this week it’s important to listen more to the qualitative measures than the financial specifics. From that perspective at least today’s news from Wells Fargo and J.P. Morgan can be considered just fine, if not spectacular.  Based on the stock market’s reception that’s good enough.

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