Mortgage

Big bank roll call: Wells Fargo, JPMorgan and Citi Q2 earnings tell three very different stories

Chase sees record quarterly revenue, while Wells disappoints

Wells Fargo, JPMorgan Chase and Citigroup reported their second-quarter earnings on Tuesday, revealing how the banks fared as the COVID-19 pandemic shut down businesses across the country. 

While the pandemic and recession are still ongoing, the earnings of the three top banks show how differently they’ve been financially impacted over the last few months, as JPMorgan Chase posted the highest quarterly revenue ever and Wells Fargo reported a $2.4 billion net loss.   

Highlighting their consumer banking results in the second quarter, HousingWire Columnist Julian Hebron commented on the earnings, stating that Chase, Wells, and Citi reporting consumer banking revenues down 7%, 26%, and 9%, respectively, is unsurprising given COVID strain.

He added that collectively setting aside $28 billion for loan losses bodes well for these banks weathering protracted unemployment, GDP weakness, and mortgage loss mitigation. 

Wells Fargo CEO Charlie Scharf commented on the increase in the bank’s reserves, stating that their view of the “length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $8.4 billion addition to our credit loss reserve in the second quarter.”

JPMorgan and Citi also touched on the increase in their credit reserves, with Jamie Dimon, JPMorgan Chase chairman and CEO, stating, “Despite some recent positive macroeconomic data and significant, decisive government action, we still face much uncertainty regarding the future path of the economy. However, we are prepared for all eventualities as our fortress balance sheet allows us to remain a port in the storm.”

“We ended the quarter with massive loss-absorbing capacity — over $34 billion of credit reserves and total liquidity resources of $1.5 trillion, on top of $191 billion of CET1 capital, with significant earnings power that would allow us to absorb even more credit reserves if needed.” JPMorgan added $8.9 billion of credit reserves in the second quarter alone. 

With two quarters still left in the year and a lot of unknowns still surrounding the pandemic, Hebron stated that it’s too early to determine whether forbearances will progress down a loss mitigation path, especially since the nation is only three months into what could be 12-months of forbearance under the CARES Act allowances. 

The latest report from the Mortgage Bankers Association shows that the share of mortgage loans in forbearance fell for the fourth week in a row to 8.18%. However, approximately 4.2 million homeowners are still in forbearance.

The impact of servicing is only one part of the equation for these banks.

When it comes to mortgage originations, Hebron said, “These three banks collectively had 12.8% market share through Q1 2020, and we’re headed for $2.6 trillion in originations this year. So. despite expected strain in other areas of these large diversified banks, they remain well positioned to serve homeowners this year and next. 

According to the 2019 Home Mortgage Disclosure Act data, Wells Fargo ranks as the third biggest mortgage lender, falling from the No. 1 spot that it held the year prior. Meanwhile, JPMorgan came in right behind it at No. 4, with Citi not making the top 10 list. 

The numbers    

JPMorgan reported the highest quarterly revenue ever, posting a net income of $4.7 billion, or $1.38 per share in the second quarter. This was down 51% from the previous year, driven by reserve builds across the firm. Home Lending net revenue hit $1.7 billion, up 51% from last year, predominantly driven by higher production margins. 

Dimon commented on this in the earnings report, attributing the activity in home lending to the the strength of their digital platform. 

Wells Fargo reported a net loss of $2.4 billion, or $0.66 per share, for the second quarter. This is compared to a net income of $6.2 billion, or $1.30 per share, for the second quarter of last year,

“We are extremely disappointed in both our second quarter results and our intent to reduce our dividend. Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $8.4 billion addition to our credit loss reserve in the second quarter,” said Scharf. “While the negative impact of the pandemic is unprecedented and many of our business drivers were negatively impacted, our franchise should perform better, and we will make changes to improve our performance regardless of the operating environment.”

Rounding out the three, Citi reported a net income of $1.3 billion, or $0.50 per share, in the second quarter, down from a net income of $4.8 billion, or $1.95 per share, for the second quarter 2019. Retail banking revenues decreased 3%, falling to $1.1 billion, as the benefit of stronger deposit volumes and improvement in mortgage revenues were more than offset by lower deposit spreads.

“While credit costs weighed down our net income, our overall business performance was strong during the quarter, and we have been able to navigate the COVID-19 pandemic reasonably well,” Michael Corbat, Citi CEO, said. “Global Consumer Banking revenues were down as spending slowed significantly due to the pandemic.”

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