JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co both reported earnings before the market opened on Friday. Wells Fargo & Company (NYSE:WFC), reported a 13% decline in mortgage volumes; JPMorgan Chase & Co. (NYSE:JPM) reported a 3% uptick. A simple weighting of the average MBA purchase money and refinance index for the period suggests an overall sequential increase of about 2% for the March quarter.
Gain on Sale or Revenue Margins
Wells Fargo & Company (NYSE:WFC)’s ratio of mortgage revenue to volume held flat for the two periods, 4Q12/3Q13 and JPMorgan’s declined from 2.75% in 4Q12 to 1.89%. The 86 bps or 31% decline in margin is at the upper end of what most analysts predicted. Analysts expect a 20% to 25% decline between 4Q12 and 3Q13.
Put Back Cost and MSR values
Both companies reported higher MSR valuations and while measures of put back cost suggested higher sequential losses, the year over year comparisons were favorable. WFC reported lower unresolved repurchase demands from both GSE and private mortgage pools.
Given the significant overlap that JPMorgan Chase & Co. (NYSE:JPM)’s commercial segment and Wells Fargo & Company (NYSE:WFC) an analysis of their results provides insight into the upcoming 1Q13 releases of the mid cap banks. Credit Suisse has an analysis of JPMorgan and Wells Fargo earnings and what it means for the smaller banks.
Mortgage banking gain on sale margins mixed with WFC’s remaining flat and JPMorgan’s falling 30% q/q: We estimate WFC’s GoS margin remained flat at 2.56% while JPMorgan Chase & Co. (NYSE:JPM)’s declined to 1.89% from 2.75%. For WFC, the margin likely benefited from two factors: (1) revenue recognition at closing and (2) mix of retail / correspondent originations shifting toward retail (~55/45 in 1Q13 vs. ~50/50 in 4Q12). However, WFC did note that GoS margins are likely to decline from this level in 2013. At JPMorgan, the mix shift between retail / correspondent tilted modestly toward correspondent. MSR valuations improved 3bps at WFC and 5bps at JPM, which should be a modest positive indication for regional MSR valuations, which we currently forecast to improve ~2bps q/q.
JPMorgan’s mgmt. noted on the earnings call that refi volumes have picked up again: As rates have declined recently, mgmt. expects refi volume to remain strong into 2Q13 now. This should be a modest positive relative to the latest MBA forecast, which embedded a 2.1% 10-Yr in 2Q13 and a 32% q/q decline in refi volumes in 2Q13.
NII and NIM declines were worse than CS forecasts at WFC / JPM’s Commercial Segment: Wells Fargo & Company (NYSE:WFC)’s NIM declined 8bps q/q vs. CS estimate of 3bps driving a 2% q/q NII decline. NII also declined 2% in JPMorgan Chase & Co. (NYSE:JPM)’s commercial banking segment. However, both results are roughly in-line with our -2% q/q NII forecast for the regional banks, which is driven by: (1) 5 bp NIM decline, (2) two fewer days and (3) relatively stable loan balances.
Commercial loan growth strong at JPMorgan Chase, but loan balances stable at Wells Fargo & Company (NYSE:WFC) (and modestly negative excluding foreign growth), which has proven to be a better comp for our regional coverage: Total loan balances at WFC were stable q/q driven by declining commercial balances (-3.3% q/q ann.), flat consumer balances and strong growth in foreign balances (+33% q/q ann.). Excluding the foreign balance growth, loans at WFC declined 1% q/q ann. In JPMorgan’s commercial segment, loan growth of 7% q/q ann. was below the CS forecast of 9% q/q ann., but above the industry growth rate (4% q/q ann. C&I growth from the H.8 data). The key drivers were strong middle market (14% q/q ann.) and real estate banking (21% q/q ann.).
Positives Takeaways from WFC:
- Provision and NCOs were below the CS forecast: Wells Fargo & Company (NYSE:WFC)’s provision declined 33% and NCOs declined 19% q/q (excluding the impact of the OCC guidance in 4Q12). However, the reserve release of $200M was modestly below the CS forecast of $250M.
- Mortgage banking gain on sale margin remained stable q/q: WFC’s GoS margin remained stable at 2.56% q/q vs. a forecast of 2.15%. On first blush, we estimate the stability was driven by two factors: (1) revenue recognition at closing (vs. lock) and (2) mix of retail / correspondent originations shifting toward retail (~55/45 in 1Q13 vs. 50/50 in 4Q12). However, WFC does note in its slides that GoS margins are likely to fall.
Negative Takeaways from WFC:
- NIM / NII declines larger than forecast: WFC’s NIM / NII declined 8bps / 2% q/q vs. CS’s forecast of 3bps / 0% q/q. The NIM decline was driven by deposit growth (3bps), variable income (3bps) and balance sheet repricing/mix (2bps).
- Loan balances declined 1% q/q ann. excluding foreign loan growth: C&I balances declined 5% q/q ann. and consumer balances were stable while the foreign segment grew 33% q/q ann.
- Mortgage banking originations declined 13% q/q vs. the MBA industry forecast of -6% q/q: The decline was largely driven by a 20% decline in correspondent /wholesale originations, while retail originations declined 6% (in-line with the industry and CS forecast).
Positives Takeaways from JPMorgan’s Commercial Banking Segment:
- Loan growth of 7% q/q ann. was well ahead of H.8 C&I growth of 4% in 1Q13: The key drivers were strong middle market banking, up 14% q/q ann. and commercial real estate banking, up 21% q/q ann.
- Mortgage originations increased 3% q/q vs. the MBA estimate of -6% q/q: While the headline is positive, the underlying data is modestly less positive as the increase was primarily driven by higher lower margin correspondent volumes (+8% q/q), while retail originations declined 1% q/q (although still better than the MBA’s estimate of a 6% decline).
- Mortgage refinancing activity likely to remain strong with recent dip in rates: On the earnings call, mgmt. noted that they expect mortgage refinancing activity to remain high in 2Q driven by the recent drop in rates.
- MSR valuation improved 5bps q/q to 93bps of serviced loans: While CS estimated a 2bps q/q improvement in MSR value, the 5bps increase was greater than forecast and we expect to see similar improvements in the regionals.
Negative Takeaways from JPMorgan:
- Mortgage banking GoS margins declined 30% q/q to 1.89% from 2.75% and vs. the CS forecast of 2.27%: Gain on sale margins were below CS expectation, although still well above the lows in the 1.30s in 2009.
- Commercial net interest income declined 2% sequentially vs. the CS expectation for stable NII: While this was partially driven by modestly lower average loan balances, we estimate the NIM declined 12 bps q/q vs. the CS forecast of ~10bps in the commercial segment.