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JPMorgan: Further Pain in Mortgages If Rates Remain Elevated

JUL 12, 2013 4:50pm ET
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JPMorgan Chase & Co. CEO Jamie Dimon warned investors that higher interest rates could lead to a “dramatic reduction” in the bank’s profits by eroding demand for mortgage refinancing.

The surge in 30-year home-loan rates to 4.46% at the end of June from 3.51% in mid-May caused second-quarter mortgage-fee revenue to decline 20%, the New York-based bank reported July 12. Refinancing volume could fall as much as 40% in the second half if rates remain elevated, CFO Marianne Lake told analysts on a call July 12.

“The environment in late May and June drove mortgage rates up significantly,” Lake, 43, said. “This pressure continued into July, and we expect it could have a significant impact on the refinance market side.”

Long-term borrowing costs climbed in the second quarter after Federal Reserve chair Ben Bernanke indicated on May 22 that the central bank may be preparing to slow its purchases of government and mortgage bonds, a program that has helped suppress rates. JPMorgan, the biggest U.S. bank by assets, might speed up its planned 19,000 job cuts “given what’s going on in the market,” Lake told journalists on a conference call.

Refinancings, which accounted for 76% of the industry’s $1.75 trillion in loan originations last year, slumped after 30-year rates surged in May and June, data compiled by Freddie Mac show. Applications to refinance loans fell 42% across the industry from May 17 to July 5, according to Joel Kan, an economist at the Mortgage Bankers Association, a Washington-based trade group.

Dimon, 57, has led JPMorgan to record earnings over the past three years as the Fed’s stimulus boosted the economy and bank profits. The company reported a 31% increase in second-quarter net income to $6.5 billion, or $1.60 a share, as a 10% jump in trading and investment banking revenue outweighed a 3% drop at the consumer and community banking unit. Total revenue rose 13% from a year earlier to $26 billion.

Still, some analysts said they were concerned that the profits depended in part on the release of $1.39 billion in reserves previously set aside to cover future loan losses that boosted earnings. Earnings were also suppressed a year earlier by a $4.4 billion loss from a wrong-way bet on derivatives.

“JPMorgan’s mortgage results were boosted by reserve releases and other non-cash gains,” Charles Peabody, an analyst with Portales Partners in New York, said in a phone interview. “Even with that, mortgage banking results declined 14% year over year,” he added, referring to total mortgage-banking net income.

Lenders have been cutting staff and reducing expenses in response to slowing global growth and historically low interest rates, which compressed profit margins on lending as well as yields on investments.

JPMorgan is eliminating as many as 19,000 jobs in its mortgage and community-banking divisions through 2014, the firm said in February. Those include 13,000 to 15,000 jobs in the mortgage unit and 3,000 to 4,000 in community banking, excluding home lending, through the end of next year, the company said. The number of personnel firmwide will shrink by about 4,000 people this year.

“We’re on track with that, but obviously given what’s going on in the market, there could be some acceleration,” Lake told journalists.

The bank’s net interest margin, which measures profit on lending, narrowed to 2.2% from 2.37% in the first quarter. Higher rates and efforts to comply with new rules requiring banks to hold more liquid assets combined to compress lending margins more than expected, Lake said.

“Rising rates will affect mortgages, and that’s negative for the group,” Brad Hintz, an analyst at Sanford C. Bernstein & Co., told Tom Keene on Bloomberg Radio. “The trading revenues look pretty darn good across the board for the group.”

Trading revenue at the corporate and investment bank, run by Daniel Pinto and Michael Cavanagh, rose 18% to $5.37 billion in the second quarter, reflecting better performance in credit and equities products, the bank said. Those figures exclude a $355 million gain from a so-called debt-valuation adjustment in the second quarter as the price of its debt fell, compared with a $755 million gain a year earlier.

Under U.S. accounting rules, banks are required to record gains and losses from securities categorized as “available-for- sale” on the balance sheet as accumulated other comprehensive income, which doesn’t affect earnings. That line, called AOCI, dropped to $389 million in the second quarter from $3.49 billion in the first quarter, according to figures on JPMorgan’s website.

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