What Do JPMorgan's Earnings Tell Us About Bank of America?

It wasn't even close. According to Standard & Poor's Capital IQ, on average, analysts were expecting JPMorgan Chase  (NYSE: JPM  ) to notch $1.22 in earnings per share for the quarter. The bank easily topped that with $1.40 in per-share earnings. 

With many more banks on tap to report earnings next week -- including Citigroup  (NYSE: C  ) on Monday and Bank of America  (NYSE: BAC  ) on Wednesday -- do JPMorgan's results signal more good news from the big banks? Let's take a look at a few crucial data points.

The mortgage bonanza!
Banks have been profiting in a big way from the mortgage writing inspired by low interest rates and the government's Home Affordable Refinance Program. Now, mind you, this hasn't meant that a ton of new lending has taken place since a big chunk of the mortgage production has been refinancing, but since banks collect a fee for mortgage originations, all of the activity has been good for the bottom line.

For JPMorgan, its mortgage-production arm produced pre-tax income of $1.1 billion, which was up nearly $600 million from last year. Other banks will likely see similar bumps in their mortgage-fee income, and for the banks -- like B of A and traditional-banking focused regionals like US Bancorp  (NYSE: USB  ) -- that could have a meaningful impact on the bottom line.

Trouble lending?
In JPMorgan's earnings report, the phrase "limited reinvestment opportunities" jumped out at me. Essentially management is saying, "We've got a bunch money to lend out, but we just don't see things we're excited to invest it in." This was further reflected in the fact that the bank's loan portfolio -- notably mortgage and home equity loans -- were down year over year.

It wouldn't surprise me at all if we saw something similar at Bank of America. The big banks have slowed down lending as they circle the wagons and repair their balance sheets. For smaller banks, however, investors may see the opposite as they've been seen picking up the slack.

This has some profit impact today, but it could be a bigger problem long term if banks can't find good ways to increase lending.

Dimon says: Better days ahead for housing
When JPMorgan's CEO Jamie Dimon speaks, people tend to listen. So it's notable that in the bank's earnings release, Dimon quipped, "importantly, we believe the housing market has turned the corner."

This is obviously a longer-term issue for investors to watch for at the banks, but there are present-day implications as well. Maybe most notably, for JPMorgan this meant a stepping down of its loan-loss provisions, which is something we've seen boosting banks' bottom lines for a while now.

Improving balance sheets and lower loan-loss provisions are both things investors should expect to see helping other banks this earnings season as well. B of A, for example, saw total credit-loss provisions fall 46% year over year in the second quarter and there's little reason to think that the momentum has changed drastically this past quarter.

All in all...
JPMorgan's earnings give bank investors something to look forward to as more banks start reporting next week. There are longer-term challenges that we're seeing like making new loans, but present-day conditions in terms of balance-sheet improvements and the mortgage-banking environment are definitely positives.

To learn more about the most-talked-about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America’s prospects, including three reasons to buy and three reasons to sell. Just click here to get access.

Fool contributor Matt Koppenheffer owns shares of Bank of America. The Motley Fool owns shares of Bank of America, Citigroup, and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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