Though net interest margins slipped at both banks, the third quarter showed impressive results from the mortgage business. Mortgage originations at JPMorgan grew 29% year over year to $47.3 billion, and CEO Jamie Dimon cited QE3 for stimulating lending growth, though Dimon also blamed Basel III capital ratios for the firm’s reluctance to lend to individuals with lower credit profiles. Wells Fargo, the U.S.’s largest mortgage lender, boosted originations to $139 billion from $131 billion during the second quarter. However, it seems like a great deal of the industry currently represents business related to refinancing rather than new home lending. Regardless, both refinancing trends and new mortgage originations have had a positive impact on the economy. The several quarters of healthy refinancing activity that Wells Fargo expects should continue to provide a lift to the economy.
JPMorgan continues to be challenged by weak capital markets revenue, the “London Whale” situation, and lawsuits stemming from the acquisition of Bear Stearns. Dimon expressed frustration with respect to the U.S. government relieving General Motors of its liabilities in bankruptcy, but not extending the same privilege to his bank with Bear Stearns. Legal expenses continue to mount, and the timing of the resumption of its buyback program or an increase in the dividend remains uncertain.
Wells Fargo’s issues stem primarily to declining net interest margins, and we don’t expect a reversal in this trend any time soon. Risk-taking remains low, especially given the low market rates for debt coupled with banks’ preference for safety lending. We think this will give smaller banks an opportunity to take market share, though concerns about the looming fiscal cliff, China slowdown and European recession appear to have tempered demand in the near term.
Though neither bank looks particularly expensive, the third quarter results of both firms highlight our lack of interest in individual banks at this time. The London Whale and weak capital markets businesses are almost entirely out of these “Too Big to Fail” banks’ control. Both JPMorgan and Bank of America (BAC) have faced expensive litigation. As a result, we prefer more diversified exposure to the financial sector via the Financial Sector SPDR ETF (XLF), which we hold in the portfolio of our Best Ideas Newsletter.