DealBook: JPMorgan and Wells Fargo Feel First Chill of Rising Interest Rates

Leslye Davis/The New York TimesJPMorgan’s profit on mortgages fell 14 percent in the last quarter.

Even as two of the nation’s largest banks reported record profits on Friday, beneath the rosy earnings were signs that a sharp uptick in interest rates could spell trouble ahead for Wall Street and the broader housing market.

Kicking off bank earnings season, JPMorgan Chase and Wells Fargo handily beat analysts’ expectations. Profit at JPMorgan surged 31 percent, bolstered by gains in the bank’s trading and investment banking business. Wells Fargo, the biggest home lender in the country, posted a 19 percent increase in its second-quarter profit.

The gains were spread across the banks except for one important source: mortgage banking. The results showed that refinancing activity slowed, as did demand for mortgage loans.

The results could worsen. If rates continue to rise, fewer borrowers are likely to refinance or buy a house. And if the mortgage bond market weakens, banks will take a smaller gain when selling the mortgages.

While these concerns have loomed for months, the earnings on Friday offered the clearest picture yet of how the interest rate turmoil could affect the banks, whose fortunes hinge in part on their lending businesses.

“We’re trying to be clear with you that this would be a significant event,” Marianne Lake, JPMorgan’s chief financial officer, said on Friday, referring to the potential effect of rising rates on the industry. She cautioned analysts that the volumes of mortgage refinancing could plunge by an “estimated 30 percent to 40 percent” in the second half of this year.

The results from JPMorgan and Wells are a barometer for the housing market because the two banks together account for the majority of all mortgages in the United States. In recent years, the recovery in the market has fueled the earnings of both companies and has also played a significant role in the broader economic rebound.

Mark Lennihan/Associated PressJohn Stumpf, chief of Wells Fargo, noted that higher rates reflected a mending economy. “I’ll take that trade all day,” he said.

Until now, the banks have benefited from government policies intended to stimulate the economy in the wake of the financial crisis. As the Federal Reserve cut interest rates in recent years, for example, it spurred millions of borrowers to refinance their home loans to take advantage of the lower costs.

But the Fed has signaled in recent weeks that it could ease its stimulus as the economy continues to recover. The warning has prompted investors to drive up interest rates around the globe. Since Fed officials first hinted that they might retreat, the rate for a 30-year fixed mortgage has risen to 4.78 percent from a low of 3.54 percent.

The banks’ second-quarter results show the early results of the sudden surge. In the second quarter, Wells Fargo received $146 billion worth of quarterly home loan applications, down from $208 billion in the period a year earlier. Its mortgage originations totaled $112 billion, down from $131 billion.

At JPMorgan, mortgage originations rose 12 percent in the quarter, to $49 billion, but overall profit in mortgage banking fell by 14 percent, to $1.1 billion.

On Friday, JPMorgan executives said the slowdown could be even more extreme than previous forecasts have suggested. While both banks might be able to seize on the uptick in interest rates to create a bigger spread between the income they derive from lending and the ultimate cost of borrowing, those benefits proved elusive.

Net interest margin, a critical measure that reveals how much profit banks earn on their loans, fell at JPMorgan, settling in at 2.60 percent for the quarter, from 2.83 percent in the previous quarter. At Wells Fargo, it was 3.46 percent, down from 3.48 percent in the first quarter.

The results suggested that the surge in interest rates came too late in the second quarter to significantly affect the banks, but that the increase could cause deeper problems in the second half of the year.

Christopher Whalen, an investor and housing market analyst at Carrington Investment Services, said that the numbers that Wells and JPMorgan presented were a “very big deal.”

“Everybody in the mortgage industry is going to have to reassess their view of this year and next,” Mr. Whalen said.

Rising rates, though, might help other parts of the banks’ business. Within its fixed-income trading operations, for example, JPMorgan reported an 18 percent increase in revenue. Fees in JPMorgan’s investment banking unit surged 38 percent, to $1.7 billion.

Wells Fargo executives played down the significance of the rate change, noting that mortgage rates were still extremely low by historical standards. John Stumpf, the bank’s chief executive, pointed to the interest he paid for his own mortgages.

“If you were in the mortgage market before 2000, you know that these are unbelievably good rates,” Mr. Stumpf said. “My first mortgage was at 8.5 percent. My second one was at 11.5 percent, and I thought those were great rates at those times.”

Mr. Stumpf noted that the uptick in rates stemmed from the Fed’s indication that the economy was improving. Housing prices are rising and demand for homes has soared.

As the improvements continue, he said, a growth in loans for new home purchases will more than make up for any losses in refinancing.

“I’ll take that trade all day,” Mr. Stumpf said. “It’s good for America, it’s good for the economy and in the long term, it’s good for our business.”

Wells’s overall loan portfolio, which includes commercial and consumer lending, actually rose 3 percent to $802 billion in the second quarter. A bump in credit cards and commercial lending — and record origination of auto loans — further offset the home loan slowdown. The bank’s total average deposits reached $1 trillion, up 9 percent from a year ago.

But important drivers of the returns at Wells Fargo and JPMorgan did not stem from substantial growth in the underlying businesses. Instead, they came from reduced expenses.

Wells Fargo, for example, reduced a crucial expense — building a reserve for bad loans. This move reflected improvements in the quality of loans.

In the second quarter, JPMorgan also lifted its profits by reducing loan-loss reserves by $1.5 billion. The bank defended the practice, saying it pointed to the improving condition of its loans.

Yet Jamie Dimon, JPMorgan’s chief executive, conceded that fresh loan growth was still “soft.”

Nathaniel Popper contributed reporting.

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DealBook: Wells Fargo Profit Rises 22%

Justin Sullivan/Getty ImagesA Wells Fargo branch in Daly City, Calif.

Wells Fargo posted a 22 percent increase in first-quarter profit on Friday as the bank, which is the nation’s largest home lender, continued to notch record gains even while its mortgage machine slowed.

The bank, which benefited from recent effort to curb expenses, reported earnings of $5.2 billion, or 92 cents a share, compared with $4.25 billion, or 75 cents a share, in the period a year earlier. The results outpaced estimates of analysts polled by Thomson Reuters, who had forecast earnings of 88 cents a share.

For Wells, which is based in San Francisco, it was the 13th consecutive rise in quarterly earnings and the eighth consecutive record.

“Wells Fargo delivered outstanding first-quarter 2013 results for our shareholders,” the bank’s chief executive, John G. Stumpf, said in a statement.

In a downside for the bank, however, its revenue slipped slightly, to $21.3 billion, compared with $21.6 billion in the period a year earlier.

And the bank’s mortgage business, riding years of record gains, finally showed it was unable to sustain the gains.

The bank’s mortgage banking income, for example, slipped 3 percent. And while handling $109 billion in mortgage originations might be a feat for some banks, it represented a 16 percent drop for Wells Fargo.

The results could present problems for Wells Fargo, whose fortunes rise and fall with the mortgage market. The bank now creates roughly a third of all mortgages in the country.

The results could also signal a flattening out of the broader mortgage market. As the Federal Reserve cut interest rates in recent years, it prompted millions of borrowers to refinance their home loans to reduce costs.

Now, that pipeline of borrowers could dry up, unless interest rates once again drop significantly or the housing market makes a fuller recovery. Refinancing accounted for 65 percent of Wells Fargo’s mortgage origination in the first quarter, down from 76 percent in the period a year earlier.

Still, the bank’s lending business showed some signs of strength. In the first quarter, that business helped lead the growth, as the banks overall loan portfolio grew 4 percent. And profit in the community banking division, which includes Wells Fargo’s retail branches and mortgage business, climbed 24 percent, to $2.9 billion.

“Loans and deposits demonstrated continued growth in a challenging economic environment,” Mr. Stumpf said.

But the strong returns were spread across the bank. The unit that caters to corporations showed improvement, with profits rising 9 percent. The bank also reported a 14 percent profit gain in its wealth management business.

It was a welcome sign for the banking industry.

Wells Fargo, along with JPMorgan Chase, kicked off bank earnings season. Citigroup, Goldman Sachs and other Wall Street giants will report next week.

DealBook: Wells Fargo Banker and 9 Others Charged With Insider Trading

The Securities and Exchange Commission accused a Wells Fargo investment banker of insider trading on Wednesday, saying that he and others took advantage of nonpublic information he obtained about merger deals involving clients.

The agency said that the banker, John W. Femenia, 30, would pass along information to a friend, Shawn C. Hegedus, who worked as a stockbroker. The two tipped other friends, who in turn passed along the information to other friends or family members, the civil complaint said. All told, the group garnered more than $11 million in illicit profits trading, the agency said.

“Here you have an investment banker who clearly knew better that inside information can’t form the basis of trading decisions,” William P. Hicks, associate director for enforcement in the S.E.C.’s Atlanta office, said in a statement. “Instead he basically started a phone tree of nonpublic information to enrich friends and others.”

Mr. Femenia is accused of tipping others about four merger deals included the acquisition of the Smurfit-Stone Container Corporation by the Rock-Tenn Company and the sale of the Shaw Group to Chicago Bridge & Iron.

The agency said that Mr. Femenia, who works for Wells Fargo Securities in New York, obtained most of the information about the deals when he worked for the firm in Charlotte, N.C.

“Wells Fargo has detailed policies and training programs on the handling of confidential information, and we have a zero-tolerance policy for the misuse of such information,” a Wells Fargo spokeswoman said in a statement. ‘We learned about the underlying allegations yesterday and are assisting and fully cooperating with the S.E.C. and other agencies in these proceedings.”

According to the S.E.C.’s civil complaint, the recipients of the tips traded in the stock and options of the companies being acquired in the deals, and at least one trader provided a portion of his profits to Mr. Femenia in exchange for the information.

DealBook: Wells Fargo's Earnings Jump 22%

At the height of the financial crisis, the mortgage business was a millstone for the banking industry. Today, it is a profit center.

Wells Fargo on Friday reported $4.9 billion in profit for the third quarter, a 22 percent jump largely led by a booming mortgage business.

The bank, based in San Francisco, continues to churn out record profit, having reported 11 straight quarters of gains in net income. The results of 88 cents a share narrowly beat the estimates of analysts polled by Thomson Reuters, who forecast earnings of 87 cents a share.

The bank’s revenue increased as well, sidestepping a common sore spot that has plagued most all of the nation’s biggest banks. Wells Fargo recorded $21.2 billion in revenue, which surpassed the $19.6 billion figure from a year earlier but was slightly below expectations.

The bank’s lending division led the growth, as consumers refinanced their mortgages to take advantage of record low interest rates. Wells Fargo, the nation’s largest mortgage lender, snared $188 billion in home mortgage applications, an 11 percent jump from the third quarter of 2011.

The bank’s chief financial officer, Timothy J. Sloan, underscored that “it’s more than just the mortgage business.” The strong results, he noted, were spread across the bank. The wealth management unit improved. So did the sales and trading business.

“We just have the great benefit of this diversified model,” Mr. Sloan said in an interview.

But investors were not fully impressed. On Friday, the bank’s shares closed down 2.6 percent to $34.25, reflecting concern about net interest margin, an important measure of the income the bank makes on its assets. The measure declined in part because the bank’s own investments suffered from an environment of low-interest rates.

Wells Fargo, along with JPMorgan Chase, began the bank earnings season on Friday. The nation’s other big banks, including Goldman Sachs and Bank of America, will report their results next week.

The Wells Fargo story line — that a deep lending effort breeds success — is rooted in broad federal stimulus efforts that have propped up the mortgage industry. An initiative by the Treasury Department is spurring refinancings. And the Federal Reserve has introduced a long-term plan to buy large batches of mortgage-backed bonds, which should help keep rates low.

Wells Fargo, more than five years after the mortgage crisis, has seized the opportunity. The bank now creates roughly a third of all mortgages in the country. Total outstanding loans jumped slightly in the third quarter to $783 billion while the bank’s home mortgage originations soared 56 percent to $139 billion.

The demand for credit came largely from refinancing, which accounted for 72 percent of all home loan applications. The Treasury program produced 14 percent of the mortgage volume.

Like other big banks, Wells Fargo makes home loans before selling most of them to investors after attaching a government guarantee. Those gains totaled $2.61 billion in the third quarter, up 225 percent from $803 million in the third quarter of last year.

The refinancing boom is fueling profits. Wells Fargo’s profit in the community banking division, which includes Wells Fargo’s retail branches and mortgage business, climbed 18 percent to $2.7 billion.

Despite the gains, the mortgage crisis continues to haunt Wells Fargo. The bank this summer agreed to pay $175 million to settle Justice Department accusations that it discriminated against certain minority homeowners from 2004 to 2009. Wells Fargo, which denied the charges, was also sued this week by federal prosecutors in New York, who claim the bank defrauded the government and lied about the quality of the mortgages it handled under a federal housing program.

Still, the legal troubles will barely nick the bank’s bottom line.

Like JPMorgan, Wells is having growth beyond mortgages. Wholesale banking, which includes the sales and trading business along with the corporate lending division, increased its profit by 11 percent, to $1.9 billion. While the unit operates in the shadow of the Wall Street investment banks, Wells Fargo has gradually extended its reach in that area.

“There are a lot of underlying positives that will continue to drive the earnings of this company,” said Edward R. Najarian, a senior bank analyst at ISI, a New York research firm.

Peter Eavis contributed reporting.