Where Is The Commercial In Commercial Banks: JPMorgan Chase And Wells Fargo First Quarter Reports

Includes: JPC, WFC, XLF
by: John M. Mason

Friday, JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC), the largest and the fourth largest banks released their first quarter earnings to the public. Nowhere in the reports of these earnings releases was there anything about "commercial" loans or "business" loans. What took front and center was performance of the mortgage part of the banks, a reduction in loan loss provisions, and the results of cost cutting. Most of the stories were about mortgages.

This is not surprising given the direction these banks have taken over the past decade, but it sure doesn't provide much confidence for a more robust economic recovery. But, then we are seeing over and over again the impacts of the "unintended consequences" of government policy.

JPMorgan and Wells made a lot of money over the past year or so on their mortgage business. Interest margins on mortgages loans have been quite good during this time period, a function of the policy of quantitative easing on the part of the Federal Reserve. However, this effect may be lessening.

Tom Braithwaite and Shannon Bond write in the Financial Times "the bumper profits that banks including JPMorgan have enjoyed on mortgages, a controversial side effect of Federal Reserve policy, appear to be on the wane. JPMorgan noted "lower margins and higher expenses" from mortgage production, which crimped income.

Until recently, (QE3) was providing a record margin between the price banks wrote mortgages at and the price they sold them on. Fiercer competition now appears to have "eroded the margin." In other words, the "free lunch" is over.

David Reilly writes in the Wall Street Journal that the net interest margin at Wells Fargo "fell by 0.8 percentage points from the previous quarter to 3.48%. JPMorgan saw a decline of 0.3 percentage points to 2.37%." These are awfully small net interest margins.

Braithwaite and Bond also report "cost-cutting and the release of loan loss reserves because of improved credit quality lay behind much of the improvements at both banks …" But they add, that this adds "to the uncertainty about the sustainability of the earnings."

They report, "JPMorgan cut some 3,000 jobs in its consumer business in the quarter, while a release of mortgage reserves boosted net income by $403 million and lower credit card loan loss reserves boosted net income by $310 million. Overall revenue fell $909 million to $25.8 billion."

The "good news" that is reported in these articles is that housing markets are improving which result in a reduction in delinquencies and charge offs. Home prices are increasing. And, home sales are up. What about business activity and business loans? Nothing!

On the other side of the ledger, Dan Fitzpatrick and Shayndi Raice report in another Wall Street Journal article that other economic data released on Friday are not that encouraging. "U. S. retail sales fell 0.4%, the biggest decline since June, while consumer sentiment slipped despite expectations from economists that it would increase. The producer price index, a measure of inflation, declined by more than expected in March, while business inventories fell short of expected increases."

Jamie Dimon, Chief Executive Officer of JPMorgan is reported as saying, "Small business remain cautious about the recovery and fiscal uncertainty and are not investing their capital." Large companies are either going to the bond markets for funds or are sitting on piles of cash.

Fitzpatrick and Raice go on to say that U.S. banks are still dealing with the "hangover" of the Great Recession. "The biggest institutions face numerous government and investor lawsuits over mortgage securities that soured during the crisis. New regulations, meanwhile, are causing banks to miss out on billions of dollars in potential annual revenue even as low interest rates crimp profits."

"The lackluster performance from two of the industry's sturdiest banks is a troubling sign as rivals prepare to report first quarter results in the coming weeks and could deepen concerns about how quickly banks will be able to replace income being squeezed by new regulations and the sluggish economy."

And, there is nothing about "business" lending

Last week I reported on business lending, Commercial and Industrial (C&I) loans, at U.S. commercial banks. "Unfortunately, it does not look as if C&I loans are expanding that rapidly this year. The latest Federal Reserve Statistics (H.8 release) show that business loans at all domestically chartered commercial banks have risen by $35.5 billion over the past 13-week period, up $19.5 billion in just the last four weeks. Of the $19.5 billion in C&I loans made over the past four weeks, $17.0 billion came from the largest twenty-five banks in the country." Business loans in the rest of the commercial banking system seem to be doing even worse!

Commercial banks are still making profits but the way they are making them does not lend much confidence about the state of the economy or the future profits of the banking industry. I guess the largest banks will find some way to keep profits up in the near future. Smaller banks, however, do not have all the gimmicks to "bump up" profits that the largest banks do and so one might expect the profit performance in this sector to be less robust.

Given this conclusion, one cannot say much encouraging about the policy actions of the Federal Reserve aimed at getting the economy growing more rapidly.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.