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.