Banks aren't out of the woods yet

Earnings from JPMorgan and Wells Fargo beat the Street this time, but the companies' gains from mortgage activity may not be sustainable.

By Jonathan Berr Apr 13, 2012 1:23PM
Shares of JPMorgan Chase (JPM) and Wells Fargo (WFC) were down in early trading Friday as investors fretted that the gains in their mortgage businesses, which bolstered their bottom lines last quarter, may not be sustainable.

First-quarter net income at JPMorgan was $5.4 billion, or $1.31 per share, down 29% from $5.6 billion, or $1.28, a year earlier, hurt by double-digit declines in investment banking fees, debt underwriting fees and advisory fees. Revenue rose 6% to $27.4 billion. Analysts had expected profit of $1.13 on revenue of $27.4 billion. The difference in the per-share figures was the result of fewer shares outstanding.

Wells Fargo's profit jumped 13% to $4.02 billion, or 75 cents, from $3.57 billion, or 67 cents, a year ago. Revenue rose 20% to $21.6 billion. The results beat analysts' expectations for profit of 73 cents on revenue of $20.51 billion.

The improvement in both banks' mortgage business was remarkable. JPMorgan reported $2 billion in mortgage fees and related revenue, reversing a loss of $489 million a year earlier. Mortgage originations at Wells Fargo totaled $129 billion in the first quarter, up from $84 billion  a year earlier. The bank's mortgage banking noninterest income rose 42% to $2.87 billion. Whether the gains are sustainable is not clear.

Though foreclosures in March were near a five-year low, experts warn that a surge in foreclosed properties looms as more properties make their way through the process. Mortgage lenders reached a settlement with state attorneys general in February over claims that they took illegal shortcuts in how they conducted foreclosures. A forecast released earlier this year by Zillow projects that housing prices will drop 3.7% this year, down from a 4.7% decline last year.

The test for Wall Street continues over the next few weeks. Citigroup (C), a major mortgage lender, issues earnings April 16. Analysts expect earnings of $1 per share on revenue of $19.85 billion, little changed from a year earlier. Morgan Stanley (MS), whose mortgage business is under federal investigation, and  Bank of America (BAC), which has scaled back its mortgage lending, report April 19. Morgan Stanley is forecast to earn 42 cents, compared with 50 cents a year earlier, on revenue of $7.24 billion, down 5% from a year earlier. Analysts expect dismal results at B of A, with earnings of 12 cents, versus 17 cents a year earlier, on revenue of $22.51 billion, down 16.2% from the year-ago period. 

The banks won't be out of the woods for another year or two. Investors should stay clear of these shares for now.

Jonathan Berr does not own shares of the listed companies.
10Comments
Apr 15, 2012 9:29PM
Apr 13, 2012 5:09PM
Apr 15, 2012 9:39PM
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Banks are rotten.If you need money they dont loan.And allways have a way to exploit.They are there for them not you!
Apr 15, 2012 11:38PM
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Dems bailing out the banks, and getting rewarded for it - all supported by the middle class tax payer. Geezzz people, vote that idiot out before its too late, and we all have nothing left but his socialist ideas. Put your $$$ in a credit union, and then pay CASH for everything possible. Beat them at their own game.

Apr 15, 2012 10:12PM
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Banks suck, stick them with a fork when they're done!
Apr 13, 2012 6:00PM
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They never have, if anybody here has a brain!!! If you have a brain you already know what i am saying but not saying! Give me millions to bail out and i will be great to for a certain amount of time!!!!!!!!!!!! Then i am going broke again. What a joke again ,all on you ****es here they will bail them out again!!!!!!!!!!
Apr 16, 2012 1:14AM
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Like i once warned three months ago,...."Invest in guns and amo"!!! Should the day ever come, (maybe sooner than later) that you need to fight just for the ability to eat, GOLD and SILVER are going to be worth squwat. Only lead will truely be of any value, and only a smart person is going to understand what i'm talking about. The rest of you crap talking investors will be the first one's i'll take what you have when I want it.
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The bank and those who represent them and make profits from them will want the party of 0% interest to play on for eternity!
Apr 15, 2012 9:11PM
Apr 16, 2012 8:41AM
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I hate stories like this. People see the headline and take down the entire sector. Not all banks have problems. Many are strong and are going to see nothing but good times.
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