JPMorgan, Wells See Big Q3 Profits as Bank Lending Returns

Strong Q3 2012 earnings helped by growth in mortgages plus consumer and commercial loans

Investors looking for good news found it Friday as JPMorgan and Wells Fargo both reported double-digit profits on the finance sector’s first day of third-quarter 2012 earnings releases.

JPMorgan Chase & Co. (JPM), often thought of as a bellwether of how both the economy and other banks are performing, saw quarterly profits rise 34% on income of $5.7 billion over the prior year’s $4.3 billion, with earnings per share of  $1.40 versus $1.02 a year ago. The results surprised analysts, who expected EPS of $1.24, and were due to strength in core lending, including mortgages, and commercial loans.

New home loans and refinancing totaled $47 billion at JPM in Q3, up 29% from last year. Mortgage unit earnings were 57% higher.

Wells Fargo (WFC) reported record quarterly net income of $4.9 billion, up 22% from last year’s $4.1 billion, also thanks to increased lending, for a total of $21.2 billion in revenues. The record profits reflected 11 straight quarters of gains. EPS came in at $0.88 versus analysts’ expectations of $0.87.

JPMorgan Chairman and Chief Executive Jamie Dimon (Photo: AP)JPMorgan Chairman and Chief Executive Jamie Dimon (left) credited continued momentum in all of the bank’s businesses, including a 9% rise in consumer and business banking.

“We believe the housing market has turned the corner,” Dimon said in a statement. “In our mortgage banking business, we were encouraged that credit trends continued to modestly improve, and, as a result, the firm reduced the related loan loss reserves by $900 million. Despite this improvement, the absolute level of charge-offs remains elevated. We also expect to see high default-related expense for a while longer."

Wells, which is the largest mortgage lender in the United States, continued to generate growth across its diversified set of businesses, said Chairman and CEO John Stumpf in a statement.

“In the third quarter, core loans grew by $11.9 billion and we saw continued strength in our mortgage and deposit businesses,” Stumpf said. “We remained diligent in managing costs and continued to have strong underlying credit performance as our loss mitigation efforts and the low interest rate environment helped improve affordability for our customers.”

Linda Duessel, senior equity strategist and senior client portfolio manager at Federated Investors, also noted that the U.S. housing situation is improving.

Speaking about the U.S. economy and investment strategies at the 2012 Raymond James Women’s Symposium on Friday in St. Pete Beach, Fla., Duessel remarked during the Q&A that JPMorgan fared well partly thanks to mortgage-backed securities.

While acknowledging that she hadn’t followed the JPM and WFC results specifically, Duessel did say that Federated since the beginning of the year has predicted that the S&P 500 would jump to 1450 sometime in the third quarter from 1257 in early 2012, and that prediction came true.

“The breadth of the advance in stocks has gotten better in this piece of the rally,” Duessel said.

Suggesting the sources of JPMorgan and Wells’ strength, she noted that as weak as the economy has been, and despite recession risk in 2013, both housing and dividend stocks have been bright spots in the last quarter.

“We know how to invest in malaise,” Duessel said. “It’s the dividend strategy.”

Read about JPM and WFC’s prior-quarter results, Q2 Earnings Kickoff: JPMorgan Down, Wells Fargo Up and Markets Heave Sigh of Relief, at AdvisorOne.

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