JPMorgan Chase and Wells Fargo, bellwethers for the banking industry, reported record earnings Friday, but those numbers masked troubling declines in revenue.
Revenue fell slightly at both banks, and the earnings gains came largely from slashing expenses and related measures. JPMorgan socked away less to cover potential lawsuits and released some of the money set aside for bad loans. Wells cut back on office space.
The results show that in an era of sluggish loan demand and increased government regulations, banks must stay lean if they want to boost earnings. The industry has come a long way since the panic of the financial crisis, but the pattern it's settled into is one of cutting expenses and maintaining revenue rather than turbocharged growth.
For both banks, analysts homed in on a slowdown in the mortgage business. For the past several quarters, the banks have enjoyed a boom in mortgage refinancings as homeowners lined up to take advantage of low interest rates. That pace now appears to be stalling, if not slowing.
At JPMorgan, mortgage applications fell about 8 percent over the quarter to $60.5 million. They were also down about 8 percent at Wells — to $140 million. Compared with a year earlier, applications at JPMorgan were up just 1 percent. For Wells, however, applications were down 25 percent.
Standards for getting a mortgage are still tight. Some homeowners might not qualify for a refinancing, because of changes to their personal finances, and others might not be able to afford one.
When homeowners refinance their mortgage, they get a lower interest rate that helps them save money over time. But getting a refinanced loan also can cost money upfront, in fees to the bank.
Analysts questioned whether the homeowners most motivated or most qualified to refinance already have — "the low-hanging fruit," as FBR Capital Markets analyst Paul Miller put it.
Tim Sloan, chief financial officer at Wells, estimated that 25 to 30 percent of Wells' mortgage borrowers were still eligible for a refinancing.
"It's a function of what their finances look like," Sloan said. "Maybe they've switched jobs and haven't had the opportunity."
Other people might not be aware of what's available.
The government is trying to raise that awareness. The Federal Housing Finance Agency on Thursday announced it would extend the four-year-old Home Affordable Refinance Program, and launch a national campaign to promote it. The program aims to encourage struggling borrowers to refinance loans at a lower rate. About 2.2 million people have refinanced their mortgages through the program since April 2009. Officials had hoped that at least 4 million borrowers would participate.
It's not clear what effect HARP might have: The big banks are already reaching out to their customers who would qualify for a refinance.
"Who knows how much it will really help," said Guy Cecala, the publisher of Inside Mortgage Finance.
The mortgage business is also less profitable than it has been in recent quarters. More lenders are competing for mortgage business, meaning some banks have to offer lower interest rates to home buyers. The banks also make money by packaging their mortgages into securities and selling them to investors, and those investors are demanding higher returns.
Wells and JPMorgan are the country's two biggest mortgage lenders. Wells controls nearly 28 percent of the U.S. market and JPMorgan controls more than 10 percent, according to Inside Mortgage Finance.
At each bank:
Profit jumped 34 percent from a year earlier, while revenue slipped 3 percent.
The investment bank underwrote more bond offerings. The private bank, which caters to wealthy individuals, brought in more revenue. Profit and revenue slipped in retail banking, which includes the mortgage unit.
JPMorgan slashed expenses by 16 percent and cut nearly 5,300 jobs, or about 2 percent of its work force. It has said that it is trimming jobs in the unit that deals with troubled mortgages, as fewer homeowners are behind on their loans. It is also installing new technology in branches that can replace workers.
In the retail bank, JPMorgan released some of the funds it had set aside to deal with potential bad loans. It added less to its reserve for legal expenses, which also boosted results, though bank officials declined to predict a trend. There are "a lot of things coming our way," said JPMorgan CEO Jamie Dimon, whose bank is still dealing with the fallout of a surprise $6 billion trading loss last year, "and we'll have to reserve appropriately as they come in."
The bank made $6.1 billion in the first quarter, after stripping out payments to preferred shareholders, up from $4.6 billion a year ago. On a per-share basis, that amounted to $1.59, blowing away the $1.39 expected by analysts polled by FactSet.
Revenue totaled $25.8 billion. That edged out analysts' estimates, but was down from $26.8 billion a year ago.
At Wells, profit jumped 23 percent from a year earlier, while revenue slipped 2 percent.
The wealth management unit increased both revenue and profit. In the retail bank, which includes mortgages, profit was up but revenue fell.
Wells trimmed expenses 5 percent, cutting down on office space and using new technology to be more efficient. It's also enjoying lower expenses because in January, it and other banks settled government accusations that they had wrongfully foreclosed on some homeowners. Wells had been spending about $125 million a quarter for staffing and consultants to review individual foreclosures.
Over the year, the bank added about 9,400 jobs, an increase of 4 percent. Last year, it was the only megabank to add jobs instead of cut them.
Wells earned $4.9 billion in the first quarter, after stripping out payments to preferred shareholders, up from $4 billion a year ago. On a per-share basis, earnings were 92 cents, beating the 89 cents forecast by Wall Street.
Revenue slipped to $21.3 billion from $21.6 billion.