US banks face profit lull as mortgage boom fizzles
Earnings at JPMorgan Chase, Wells Fargo buoyed by wave of refinancing, but medium term outlook bleaker
Unexpectedly large quarterly profits at JPMorgan Chase and Wells Fargo hide a more worrisome forecast for the rest of the year for many US banks. Things could get worse before they get any better.
Wells Fargo’s profit was buoyed in the second quarter by consumers rushing to refinance their mortgages and buy new homes, driven by record low interest rates and a recovering housing market. JPMorgan’s mortgage lending helped the bank for much of last year, and second-quarter results this year were by some measures strong too - it made more loans, even if its pretax profits from lending fell 37 per cent.
But mortgage lending is likely to be less of a support for banks going forward, as the US Federal Reserve has started talking about tapering off its massive bond-buying program and borrowing rates for home loans have jumped. Thirty-year mortgage rates rose to 4.58 per cent at the end of the second quarter, up 0.82 percentage point from the first quarter.
Executives from both banks, which between them make one in three US home loans, said on Friday that mortgage lending volumes would decline in the coming months and so profits from the business would fall. JPMorgan Chief Financial Officer Marianne Lake said rising mortgage rates could slash volume by 30 per cent to 40 per cent. That would result in a “dramatic reduction in profits” in the business, JPMorgan Chief Executive Officer Jamie Dimon said.
At the same time economic growth has not ramped up enough for the rest of these banks’ businesses - such as small business loans and credit cards - to make up for the loss of that income. There may be a lull between the drop-off in mortgage lending and the boost to other forms of revenue from an improving economy and higher long-term interest rates.
“If the economy is getting stronger, it’s not manifesting itself in terms of balance sheet growth of the banks,” said Christopher Mutascio, a banking analyst at Keefe, Bruyette & Woods. “Mortgage headwinds are a bit more instantaneous, and the pick-up in the other business lines may take some time.”