JPMorgan (JPM), the largest U.S. bank, and Wells Fargo (WFC), the No. 1 mortgage bank, on Friday reported better-than-expected Q3 earnings growth on an improving housing market, but shares of banking giants retreated.
Record-low interest rates squeezed Wells' margins more than expected. Both noted regulatory uncertainties and other economic hurdles. Wells shares lost nearly 3% to 34.25. JPMorgan fell 1% to 41.61.
JPMorgan reported earnings per shares of $1.40, up 37% vs. a year ago. Net revenue grew 6% to $25.86 billion. Analysts surveyed by Thomson Reuters expected EPS of $1.24 on revenue of $24.53 billion.
'Turned The Corner'
CEO Jamie Dimon said housing has "turned the corner," with revenue from mortgage production up 36% vs. a year ago to $1.8 billion. The bank reduced by $900 million the money it sets aside to cover bad loans.
Investment banking revenue fell 1% to $6.3 billion, but JPMorgan said it remained No. 1 in global investment banking fees. And core revenue in that group was up $2 billion, to $6.5 billion.
Keefe, Bruyette & Woods analyst David Konrad called it "a noisy quarter due to higher credit costs" and other issues. But he was optimistic the investment banking side can hold on to that momentum.
The bank also said it's closing positions on the botched London Whale trades and hedges. Losses on that portfolio were $449 million in Q3, less than the worst-case scenario of $800 million to $1.6 billion Dimon gave earlier. The running tally on that embarrassment — which came to light in April, sparking regulatory ire and a reshuffling in that division — is about $6.2 billion.
"It's obvious we had a gap in the armor here," Dimon said in a call with analysts. "Like I said, an arrow went right through that gap. But other than that gap we think we have pretty damn good controls in stuff like that.
Wells Fargo, meanwhile, reported earnings of 88 cents a share, up 22% from a year ago, a penny above forecasts. Revenue rose 8% to $21.21 billion, slightly below views for $21.47 billion.
A Narrow Margin
The bank originated $139 billion of mortgage loans, up from $89 billion a year earlier, as homeowners refinanced at record-low rates. But those rates crimped the bank's net interest margin — the spread between what it pays for deposits and makes back on loans. The margin fell by 25 basis points to 3.66%, a far bigger decline than the bank warned about last month.
CFO Timothy Sloan said Wells didn't manage its business around that volatile figure and would not take on riskier loans just to boost it.
"We could have easily increased our net interest margin by making some bad short-term decisions," Sloan said in a conference call with analysts.
While housing appears to be recovering, the lower margins on loans could remain.
Wells and others also face lingering scrutiny on loans made during the housing bubble. The government sued the bank Oct. 9, accusing it of making reckless loans; that forced high government insurance program payouts.
New York on Oct. 1 sued JPMorgan over Bear Stearns mortgage securities. JPMorgan bought Bear in the 2008 financial crisis.