The Big Banks Come Through Big Time

Today was a big day for the nation's biggest banks.

On one side of the country, JPMorgan Chase (NYSE: JPM  ) , Wall Street's largest and most preeminent lender, announced that its quarterly earnings rose by an astounding 31% compared to the same quarter last year. Meanwhile, on the other side of the country, Wells Fargo (NYSE: WFC  )  the California-based mortgage banking behemoth, said that its second-quarter net income shot up by 19%.

These are huge numbers. When a typical investor hears growth rates like these, the first thing that comes to mind is a young and popular upstart company -- a growth stock, if you will. The last thing one would associate them with, in other words, would be the nation's largest and fourth largest banks by assets -- click here to see a chart of the nation's biggest lenders.

Just so we're on the same page, these two institutions alone exercise direct control over a combined $3.9 trillion in assets. And when you add in assets under management, that figure grows to $7.5 trillion, or nearly half of the annual gross domestic product of the United States.

So, how did they do it?

In JPMorgan's case, it largely has its investment banking operations, as well as a smaller loss in its private equity arm, to thank. Net income in its corporate and investment bank was up by nearly $500 million, or 19%, compared to the same quarter last year. Investment banking fees in particular grew by an impressive 38%, driven by higher debt and equity underwriting fees.

Its results on the retail side were less impressive, albeit predictably so given the sharp uptick in long-term interest rates. Deposits and mortgage originations were up by 10% and 12% on a year-over-year basis, respectively. But the net income attributable to the division nevertheless fell by 6% as a result of lower loan balances and mortgage banking income.

With respect to Wells Fargo, the source of its massive gain was more nuanced. Indeed, on the surface, it's hard to understand how it could have recorded such an impressive headline figure in the first place.

The bank's pivotal net interest margin, which is the difference between a banks yield on earning assets and its cost of funds, fell by two basis points from the first quarter and by a staggering 45 basis points relative to the same quarter last year. And on top of this, its bread-and-butter mortgage banking division showed obvious signs of fatigue.

While every single bank in the country would salivate over the mere thought of underwriting $112 billion in home loans as Wells Fargo did during the three months, that figure nevertheless came up markedly short of the $131 billion that it originated in the second quarter of 2012. To be clear, this was expected, given the massive surge in interest rates that began at the end of May. At the same time, however, this is the work horse of Wells Fargo's veritable money-printing machine.

The source of Wells Fargo's growth, in turn, had less to do with its operations and more to do, to a certain extent at least, with accounting. In the second quarter, the bank set aside $1.15 billion less in provisions for loan losses compared to last year. Consequently, when you consider that its net income grew by only $897 million, everything starts to make sense.

Accounting aside, let me reiterate: Both of these banks had fantastic quarters. They earned a lot of money, grew their loan and deposit bases, and reported improvements in the quality of their assets. Was there a little smoke and mirrors? Sure. But that's par for the course during earnings season. Now it remains to be seen whether Bank of America and Citigroup, the two basket cases of Wall Street, have similar experiences.

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Read/Post Comments (6) | Recommend This Article (26)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 12, 2013, at 2:50 PM, SkepikI wrote:

    John: if the commentary on your article why people hate BoA is any indicator, the comparison should be dramatic. I hope you showcase it no matter what the result is. I think BoA runs a bad business that alienates customers...BUT I'd like to see the facts in this fantastical quarter.

  • Report this Comment On July 12, 2013, at 3:51 PM, foolishlymeek wrote:

    John, great article. Since I own Wells Fargo (a Buffett favorite), an increase in net income is great to see. I just wish it were pure income and not income plus "smoke and mirrors."

    I have one little editing issue, though. As a former English teacher, it really bothers me. "Banks" is a plural noun. "A banks" makes me think your native language is not English. "A banks yield" needs and apostrophe s. :)

    However, I did enjoy the article and the comparison between these banks. I, too, would love to see an article on BoA's and Citigroup's performances this past quarter. I own both since I loved the high dividends banks used to pay. I'm still holding hoping for a comeback for these two banks - maybe my heirs will see a profit!!

  • Report this Comment On July 12, 2013, at 5:17 PM, xetn wrote:

    Comes through? I would imagine anyone that could get basically free money, use it without fear of any risk, could make big time earnings. Compliments of the Fed and the taxpayers (payers of last resort).

  • Report this Comment On July 12, 2013, at 5:43 PM, grahamsway wrote:

    It usually pays to be a little cautious with bank earnings. When they do well, they do very well. Then when things turn, all the bad news they didn't account for shows up and they end up looking really bad.

    I've always felt more comfortable investing in banks after they reported bad news than good.

    Here,

    http://beta.fool.com/grahamsway/2013/02/08/profitable-charac...

    I mention why.

  • Report this Comment On July 12, 2013, at 11:40 PM, Yakesh wrote:

    Wells Fargo has done slow changes to its fee and bill pay policies. It now pays bills after two days rather than one day keeping large cash of account holders for two days. Idea is simple-suck your own depositors as the money is lying in their accounts and not many will go away. Not sure if they make more money from lending or from fee. Good for shareholders and CEO but bad for depositors who provide blood and oxygen to the Bank.

  • Report this Comment On July 13, 2013, at 2:52 AM, captam wrote:

    So they all back to their casino activities again!

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