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(Reuters) - JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N) reported strong growth in their mortgage lending businesses and lower loan losses on Friday, offering signs of improvement in the U.S. economy.
The banking giants cited increases in mortgage originations and a strong pipeline of applications, spurred by low interest rates and a government program intended to spur refinancing.
The performance of JPMorgan's core businesses helped offset a $4.4 billion trading loss in its Chief Investment Office, relieving investors who worried about the impact of the embarrassing "London Whale trades" on the bank's bottom line.
The two banks' results boosted their shares and helped U.S. stock indexes rally at the end of a down week.
Wells, the largest U.S. mortgage lender, and JPMorgan, the largest U.S. bank, also said charge-offs for bad loans declined while demand for new debt, ranging from auto loans to commercial loans, increased. But the mortgage business was a particularly bright spot for both banks.
"We've seen increases in sales and pricing in markets throughout the country, even in some of the hardest-hit areas during the downturn," said Wells Fargo Chief Executive John Stumpf.
Wells reported a 17 percent increase in quarterly profit, as mortgage originations more than doubled from a year ago, to $131 billion. The bank also cited record quarterly applications, and said it had 29 percent more unclosed loans in its pipeline than at the end of the previous quarter.
"The standout I'm seeing with Wells Fargo is the mortgage banking," said Shannon Stemm, a banking analyst with Edward Jones. "That has been such a driver for them over the long term, and refinancing is really pumping things up."
The San Francisco-based bank posted mortgage banking income of $2.9 billion, up from $1.6 billion a year ago and up slightly from the first quarter.
The gains came in spite of higher loss provisions for bad mortgages Wells Fargo may be asked to repurchase from investors. The bank also set aside reserves for a $175 million settlement to resolve Justice Department allegations that it charged African-Americans and Hispanics higher rates and fees on mortgages during the housing boom.
JPMorgan's overall profits declined because of huge losses on risky derivatives trades in its investment division. But net income from the bank's retail financial services business, which includes mortgages, nearly quintupled to $2.3 billion.
JPMorgan's mortgage banking originations rose 29 percent, with its mortgage production and servicing business reporting net income of $604 million, compared with a net loss of $649 million a year earlier. Other indicators of loan demand, including credit card sales volumes, commercial banking loan growth and loan charge-offs, also showed improvement.
JPMorgan set aside $214 million for credit losses, compared with $1.8 billion a year ago.
Asked by an analyst about the "disconnect" between JPMorgan's underlying loan growth trends and negative economic news, CEO Jamie Dimon said U.S. companies are faring relatively well.
"The fact is the underpinnings of the American economy aren't that bad," Dimon said. "Corporate America, middle market companies, small business are OK, a lot of liquidity. There's not a huge order book so sales aren't growing dramatically. We have slow, modest growth."
Wells Fargo said it would not meet a previously stated cost-cutting target for the fourth quarter because it must pay more compensation than expected due to higher revenues, particularly in its mortgage business. The bank added more than 2,000 employees during the quarter as it scrambled to capture more loans.
"We will not pass up revenue opportunities in order to meet a specific expense target number," said Chief Financial Officer Tim Sloan.
The bank previously said it expected expenses to fall to $11.25 billion by the fourth quarter as part of an efficiency push. On Friday, Wells said it would miss that target even though expenses would continue to trend down.
In the wake of its Justice Department settlement, Wells on Thursday said it would stop making mortgages through independent brokers, the source of many of the loans that came under scrutiny. Those mortgages account for 5 percent of the bank's volume, but the decision "won't have a significant impact on our earnings," Sloan said in an interview.
The settlement won't require any big changes in how the bank operates, Sloan said. "We don't think we've got a fair lending problem, but we thought it made sense to settle," he said.
Overall, Wells Fargo said second-quarter net income was $4.6 billion, or 82 cents a share, compared with $3.9 billion, or 70 cents a share, a year earlier.
Analysts' average estimate was 81 cents a share, according to Thomson Reuters I/B/E/S.
Earnings benefited from the release of $400 million in reserves previously set aside for loan losses.
Revenue was $21.3 billion, up from $20.4 billion a year ago. Expenses totaled $12.4 billion, down slightly from a year earlier.
Wells Fargo's total loans increased by $8.7 billion from the first quarter to $775.2 billion, boosted mostly by $6.9 billion in business and foreign loans acquired from BNP Paribas and WestLB. In the past year, the bank has been active in buying portfolios from retrenching banks that are selling assets to boost capital.
JPMorgan reported net income of $4.96 billion, or $1.21 a share, including a $4.4 billion trading loss. That compared with $5.43 billion, or $1.27 a share, a year earlier.
Even as JPMorgan executives briefed analysts and reporters on the trading losses, they emphasized the strength in more traditional lending and deposit-taking, which Dimon attributed to economic growth, although modest, and market share gains.
The bank reported its eight consecutive quarter of commercial loan growth, as well as the jump in mortgage originations and a 12 percent rise in credit-card sales volume.
JPMorgan's total loans rose by $6.6 billion in the quarter, to $727.6 billion. Consumer loan balances declined overall due to charge-offs, but that decline was offset by strong growth in wholesale loans.
The banks' results boosted their shares and those of other banks. JPMorgan shares surged 5.9 percent to $36.05 in late afternoon trading, while Wells Fargo's shares climbed 3 percent to $33.87, helping the Standard & Poor's 500 Index .SPX rise 1.6 percent after a string of losses this week.
Reporting by Rick Rothacker in Charlotte, North Carolina, and Lauren Tara LaCapra in New York; Editing by John Wallace, Gary Hill