Two of the United States' biggest banks, Wells Fargo and JPMorgan Chase, made record profits over the last three months from a sharp rise in mortgage lending, though performance stumbles elsewhere left investors worried about how long those profits can last.
Both banks reported double-digit increases in third-quarter earnings as record-low interest rates and an uptick in the housing market drove a boom in mortgages.
But analysts said those record earnings might not be sustainable, as each bank posted declining margins that suggest they may have a harder time earning as much in the future.
JPMorgan shares closed down 1.1 per cent at $41.62, while Wells Fargo declined 2.6 per cent to $34.25. Both underperformed the broader market, which was flat.
The issue is the "net interest margin," or the spread between what the banks earn from loans and what they pay out on deposits. That margin contracted in both cases. "You have a battle between net-interest margin and mortgage banking," said Marty Mosby, an analyst at Guggenheim Securities, referring to the tension between profit-drivers now and potential future results.
The mortgage market dragged on banks during the worst of the financial crisis but has become a bright spot of late. After the Federal Reserve said in September it would buy huge quantities of mortgage bonds every month for the foreseeable future, rates fell sharply and loan applications soared.
Wells Fargo, by far the largest mortgage lender in the country - three times the size of its closest peer - made $139 billion in mortgages in the three months ending in September, up $50 billion from a year earlier.
There is a limit to that growth, though, warned JPMorgan Chief Executive Jamie Dimon.
"We don't expect to count on high margins and mortgage origination forever," Dimon said on Friday. The refinancing trend, he added, will continue "next quarter, maybe for a couple of quarters after that, but it won't last much longer."
Besides the good news about the housing market, J.P. Morgan also reported that losses are shrinking rapidly from the bad trades engineered by the so-called London Whale, which cost the bank almost $6 billion in the first half of the year.
The losses cast a harsh light on Dimon, the chief executive viewed by some as a potential leading candidate for U.S. Treasury secretary in a second Obama administration. He has apologized repeatedly, and at length, for failing to catch the problem before it grew so big.
The nation's largest bank by assets posted net income of $5.71 billion, or $1.40 a share, up 34 percent from a profit of $4.26 billion, or $1.02 a share, a year earlier.
