US Bank Profits Grow, With Several Caveats


Three of the nation’s biggest banks – JPMorgan Chase, Bank of America and Wells Fargo – are benefiting from growing deposits, fewer bad loans and higher investment-banking fees.

But not everything is rosy as the banks report earnings this week. Revenue remains weak, and some of the banks’ earnings have come from one-time accounting moves. There are also ongoing legal expenses related to mortgage securities and other kinds of lawsuits.

Among the trends in fourth-quarter bank earnings:

REFINANCING BOOM WANES: Interest rates are rising, and fewer Americans are getting mortgages or refinancing their homes. All three banks reported double-digit declines in their mortgage business for the fourth quarter. All expect a further slowdown in mortgage originations this year.

Mortgage rates are tied to the bond market, where yields have risen steadily since May 2013. Mortgage giant Freddie Mac said last week that the average 30-year fixed-rate mortgage had an interest rate of 4.51 percent, compared with 3.35 percent in May 2013.

“It’s no surprise that the banks’ mortgage businesses have slowed,” said Michael Scanlon, a managing director at John Hancock Asset Management.

The slowing has led to thousands of layoffs at the banks.

LOAN PROVISION BOOST: A large chunk of fourth-quarter earnings at JPMorgan, Bank of America and Wells Fargo came from an accounting maneuver related to loan-loss reserves.

Because of the way bank accounting works, money pulled from loan-loss reserves can be used to increase profits.

Here’s the backstory. During the financial crisis, as tens of thousands of Americans fell behind on their mortgages, banks started putting lots of money into reserves to cover potentially bad loans. At the height of the crisis, the big banks had socked away tens of billions of dollars into loan-loss accounts.

As the economy improved, most of those loans never went bad, or were refinanced. So banks have moved money steadily out of reserves and back onto profit-and-loss statements.

In the latest quarter, JPMorgan had a $1.3 billion boost to earnings, because it reduced the amount of money in its loan-loss reserves. Bank of America added $1.8 billion to its profits, and Wells Fargo benefited from a $600 million boost from its loan-loss reserves.

A bank’s loan-loss reserves only go so far, and there’s only so much money a bank can release from them. Analysts say that banks are going to have to find other ways to replace these one-time jolts.

LEGAL TROUBLES REMAIN: The big banks, particularly JPMorgan and Bank of America, are mired in legal problems that continue to erase billions of dollars in profits.

JPMorgan had $1.1 billion in legal expenditures in the fourth quarter, some of which was part of its $2.5 billion settlement tied to the Bernard Madoff fraud case. Bank of America had $2.3 billion in legal expenses.

REVENUE DECLINES: It’s harder for banks to issue new loans, because of tighter lending standards following the financial crisis. As a result, revenue growth is tougher.

JPMorgan’s fourth-quarter revenue fell 1 percent from a year earlier. Wells Fargo’s revenue was down 5.5 percent. Bank of America’s revenue, however, rose 15 percent, because of higher investment-banking fees and brokerage income.

To keep profits growing, the big banks have been cutting headcount and expenses. Non-interest expenses fell at Wells Fargo, Bank of America and JPMorgan in the fourth quarter compared with a year earlier, and all three banks also reduced their payrolls.

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