Oct. 11 - Dark clouds continue to hover around the banking sector as JPMorgan Chase and Wells Fargo dig into cash reserves to offset losses in parts of their businesses. Conway G. Gittens reports.
Easy money is getting harder to come by for two of some of America's largest bank. The mortgage business that stuffed bank coffers during the early days of the housing recovery is now sliding and taking the fortunes of banks along with it. Quarterly results out of JPMorgan Chase and Wells Fargo show the pressure is even worse than expected, says Fred Cannon, global head of research and chief equity strategist at Keefe, Bruyette & Woods. SOUNDBITE: FRED CANNON, GLOBAL HEAD OF RESEARCH/CHIEF EQUITY STRATEGIST, KEEFE, BRUYETTE & WOODS (ENGLISH) SAYING: "What's happened is everybody chased...we brought a lot of capacity in the mortgage business with the big refi wave over the past few quarters, suddenly that's going away and so we have all these lenders chasing after these loans. So not only did volume go down by 30 percent but we had the margins that they make on each loan go down by 30 or 40 percent. So it's been a pretty nasty quarter so far." But that's not J.P. Morgan's only problem. The cost of paying out, fighting off, and laying aside for legal woes is eating away at profits too. Just take a look at how the bank's net income was steady or steadily climbing, hitting a record last year... falling to a deficit of $380 million in the third quarter. So rare that it's the first loss since CEO Jamie Dimon took over, and the first going back in almost a decade. The bank has amassed a whopping $23 billion litigation fund. Last quarter alone it spent $7.2 billion on legal expenses after taxes and a resolution is nowhere in sight. Despite the dark shadow, and a drop in revenues, Cannon is willing to be patient. SOUNDBITE: FRED CANNON, GLOBAL HEAD OF RESEARCH/CHIEF EQUITY STRATEGIST, KEEFE, BRUYETTE & WOODS (ENGLISH) SAYING: "What they are going through now is a simplifying approach to making the business profitable over time." Meanwhile, Wells Fargo, the top U.S. mortgage lender continues to trim the fat, cutting 5,300 from its payrolls in the third quarter. But should benefit going further if home prices stabilize. Trading revenues were a bright spot for both banks, which bodes well for upcoming results out of Morgan Stanley and Goldman Sachs.