JPMorgan Chase (JPM) and Wells Fargo (WFC) are really two different kinds of banks and so cannot be compared directly. Both produced good results for the second quarter of 2013, but the basic banking business in each was not strong. Both organizations, in announcing their second quarter earnings results, cautioned about the future.
JPMorgan reported net income of $6.5 billion. This was up 31 percent from the year earlier, but remember that a year earlier, the bank's results had been impacted by information being released on earlier trading losses.
About a quarter of these earnings came from the release of loan loss reserves. Of course, this is good news because it shows that management…and the regulators…believe that the problems in the loan portfolio have lessened due to a stronger economy. However, it also indicates that the performance of net income was not solely a result of banking operations.
Furthermore, the corporate and investment banking division added another $2.84 billion to net income, about 44 percent of the total. Investment banking fees accounted for $1.7 billion of this total, a result of higher debt underwriting fees.
Thus, only about 30 percent of JPMorgan's net income came from more traditional banking activities.
Obviously, an organization like JPMorgan Chase is not excited about the Warren/McCain initiative in the US Congress to restore legislation similar to the old Glass-Steagall Law that would separate commercial banking activities from investment banking activities. During the conference call reporting the second quarter results to the investment community, Marianne Lake, JPMorgan's chief financial officer, dismissed discussion of this topic.
Wells Fargo relies much more on traditional commercial banking activities, although it is more weighted toward residential mortgages than are most commercial banks. In fact, Wells Fargo and JPMorgan Chase produce more than 50 percent of all the residential mortgage originations in the United States. And, Wells Fargo produces way more residential mortgage originations than does JPMorgan.
Wells Fargo produced $5.5 billion in net income in the second quarter of 2013. About $0.5 billion of this increase came from the loan loss reserve releases, about 9 percent of the reported results.
The analysis of the Wells Fargo results generally related to what happened to the mortgage portfolio. Although the bank received $148 billion in home loan applications in the second quarter, this was down from $208 billion in applications in the same period last year. Actual mortgage originations were at $112 billion for the quarter, down from $131 billion a year ago.
The main thing driving the Wells performance was its net interest margin, which was at 3.46 percent in the second quarter, down from 3.48 percent in the first quarter. Note that the net interest margin at JPMorgan Chase was 2.60 percent in the second quarter, down from 2.83 percent in the earlier period. The difference in the net interest margins in the two banks shows up the differences in the business model of the two different organizations.
JPMorgan, obviously, relies less on its net interest margin to produce results than does Wells Fargo.
Just one final note on the figures: both organizations indicated that a large portion of their mortgage business came from refinancing. For example, at Wells Fargo, refinancings totaled 56 percent of all new loans. This was down from 69 percent in the first quarter. JPMorgan Chase also indicated that a large portion of its new loan originations came from refinancings.
Total loans at Wells Fargo were up modestly from the second quarter of 2012, while the total loans at JPMorgan Chase declined year-over-year.
Apparently the second quarter results of both banks were not much impacted by the rise in longer-term interest rates that took place in May and June.
In discussing JPMorgan Chase and Wells Fargo, we are talking about two banks that have combined deposits of about $2.2 trillion. This is about 41 percent of the $5.4 trillion of assets that reside in the largest 25 domestically chartered commercial banks in the United States. So, we are looking at a major portion of what is happening to the larger banks. (Note: my latest discussion of the "smaller banks" can be found in my post "Smaller Banks Do Not Seem to be Doing Very Well.")
In summary, both banks have taken advantage of their better asset quality and reduce their loan loss reserves. This is a good indication that the loan portfolios of the larger banks are becoming less of a concern, both to the banks…and to the regulators.
Secondly, both banks have done well in residential mortgage lending over the past two quarters, but the majority of the lending has come in the form of refinancings. If longer-term interest rates continue to rise causing mortgage interest rates to rise, residential mortgage lending will tend to drop off, especially in the area of mortgage refinancings. This could slow down loan portfolio growth in the future, something that has not been very strong anyhow.
Executives at both banks cautioned about a possible slowdown in the mortgage market due to the rising interest rate environment.
Third, neither bank indicated much demand for commercial loans. The economy remains weak and, consequently, business loan demand is largely absent at these larger banks. This seems to be the case across the board.
Jamie Dimon at JPMorgan Chase seemed a little more optimistic about the future of economic growth than did John Stumpf, the CEO of Wells Fargo. Neither expressed much enthusiasm about the possibilities of a more robust economic future, however.
With the possibility of rising interest rates and the "tapering" off of Federal Reserve securities purchases, the financial markets in the near future will probably become more volatile. This should be to the benefit of JPMorgan Chase because it would profit from increased fees from financial transactions. In this way, it will probably come through the Fed's transition out of quantitative easing better than will Wells Fargo. However, I don't expect that either bank will make much from its traditional banking business during this time.