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Fewer mortgages, less trading and more regulations hurt bank earnings: Chris Whalen

Daily Ticker

The last thing the stock market needed today was more bad news, but that's just what it got when JPMorgan (JPM) reported a 19% decline in first quarter earnings.

Profits at the country's largest bank fell $1.26B from a year ago to $5.27B, or $1.28 a share, well below expectations of $1.40 a share. Revenues were off 8.5% to $22.3 billion

A major reason for the profit drop: a decline in the bank's mortgage business. Mortgage loan originations plummeted $17 billion, or 68% from the year before.

Related: 'Banks need more capital - the good times won't last forever': Sheila Bair

"There aren't many [mortgage] customers out there," says Chris Whalen, NY- based author and investment banker. He explains that a weak job market and sluggish incomes are crimping demand for housing while new bank regulations under Dodd-Frank mean many people can no longer qualify for a mortgage. In addition, new capital rules incentivize banks to "really write only prime mortgages" and investors, who have accounted for about 40% of home purchases but are now leaving the housing market, says Whalen.

Even Wells Fargo (WFC), the country's biggest mortgage lender, which reported a 14% bounce in profits to $5.89 Billion or $1.05 a share, saw its mortgage origination fall 67% in the first quarter.

Related: Here's why we won't see another Glass-Steagall

"Generally you're going to see very soft mortgage market and uncertainty on the trading line" for banks, says Whalen. And he expects new banking regulation will also hurt profits. "if you take the principal trading away from the banks you've really taken a big chunk of the business away from them" and reduced liquidity in the market overall, says Whalen.

"Trading by the London Whale provided liquidity in things like corporates and preferred," says Whalen. "There is no liquidity in these markets today so when you have tough days like we've had in the last several you can have a very sharp drop in the market because there's no capital supporting that part of the marketplace."

Related: 'Heads will roll' at Citi after Fed rejects its capital plan: Belpointe's Nelson

Next week, Citigroup (C)  Bank of America (BAC), Goldman Sachs (GS) and Morgan Stanley (MS) report their first quarter earnings.

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