KBW: What Wells Fargo, Chase 4th quarter results mean for the rest of the industry

A deeper dive at the big banks' mortgage banking earnings

While the fourth-quarter results for Wells Fargo and JPMorgan Chase were decidedly mixed, with JPMorgan significantly exceeding and Wells Fargo missing market expectations, there was one common denominator among the big banks’ earnings – lower earnings from mortgage banking.

Wells Fargo’s mortgage banking revenue fell by $250 million from the previous year, while JPMorgan saw mortgage banking revenue fall by 10% from the third quarter.

But what should the market make of those results? Are they outliers or harbingers of things to come for the rest of the mortgage business?

Well, a new report from Keefe, Bruyette & Woods suggests it’s a little bit of both.

According to the KBW report, the mortgage banking earnings for JPMorgan and Wells Fargo were “largely in line with expectations,” albeit with higher originations for both banks that expected.

“While volumes came in better than our estimate and consensus, lower earnings were driven by lower gain-on-sale margins,” KBW said in its report.

KBW said that JPMorgan and Wells Fargo’s higher than expected origination volume compared to the shrinking application pipeline, especially at Wells Fargo, provides insight into what to expect for the rest of the mortgage market.

According to KBW’s report, JPMorgan’s mortgage origination volume of $29.1 billion was up 7.4% quarter-over-quarter from $27.1 billion, while Wells Fargo’s origination volume was up 2.9% to $72 billion from $70 billion quarter-over-quarter.

“These initial numbers suggest that closing volumes were likely higher than industry expectations,” KBW said. “This likely resulted from lower levels of ‘fallout’ as borrowers locked in lower mortgages rates. Wells Fargo’s application pipeline fell by 25%, which is a good indication of trends in future closings.”

Additionally, KBW notes that the gain-on-sale margins were down “more meaningfully” at JPMorgan compared to Wells Fargo.

KBW notes that Wells Fargo’s gain-on-sale margins are not necessarily a good indicator for the rest of market because Wells Fargo recognizes gains on closing versus rate lock, which results in less downward pressure on gain-on-sale margins as rates increase.

Broken down in more detail, JPMorgan’s gain-on-sale margins were down to 0.63% from 0.91% in the previous quarter, while Wells Fargo’s was down to 1.68% from 1.81% in the previous quarter.

“We note that Wells Fargo recognizes income on closing so they are less likely to see the timing related declines in gain-on-sale margin that others will likely see,” KBW stated.

“We believe reported margins from Bank of America and JPMorgan are probably better proxies for gain-on-sale trends in this quarter than Wells Fargo,” KBW continued. “The gain-on-sale margin at Bank of America declined to 71 basis points from 1.26% in 3Q.”

KBW said that these results lead to its analysts predicting lower gain-on-sale margins across the industry this quarter.

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