July 12 - Banking giants JP Morgan Chase and Wells Fargo handily surpassed second quarter targets but a repeat performance in the year ahead may be challenging. Jeanne Yurman reports.
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Mega banks, JP Morgan Chase and Wells Fargo reported second quarter results blowing past Wall Street forecasts as they kicked off the earnings season for banks.
JP Morgan's quarterly profit shot up 31% to $6.5 billion while Wells Fargo's jumped 20% to just over $5.25 billion.
JP Morgan, the nation's largest bank, upped its dividend amid strong trading and investment banking. And Wells Fargo, the number one mortgage lender saw an improved home loan business.
Great quarter, say many analysts, but enjoy it while it lasts. Looming large is the prospect of higher long term interest rates. The yield on 10-year Treasuries has risen as much as one percentage point from record lows in early May and is expected to go higher.
That spurring loftier interest rates which can help improve banks' net interest margins - a gauge of how profitable the banks' loans are - but not right away says Tom Alonso, Macquarie Securities.
TOM ALONSO, SENIOR ANALYST U.S. BANKS, MACQUARIE SECURITIES SAYING (English):
"In the longer run higher rates are good for banks but there will be an adjustment period, especially if you have a very quick move like we've seen here."
Banks make more money on loans with higher lending rates, but those higher rates also hurt their current holdings, like bonds and mortgage demand especially refinancings which are already feeling the pinch says Standard & Poor's Capital IQ's Erik Oja.
ERIK OJA, EQUITY ANALYST, STANDARD & POOR'S CAPITAL I.Q. SAYING (English):
"In terms of loan growth it was quite low for both. In fact a little bit lower than we expected. So if we can cast that out to next week we will probably see pretty low loan growth in the second quarter. Revenue growth is under challenge."
Another drag on future profits: both banks got a healthy bottom line boost from lower loan loss reserves. That is as the quality of customers' credit improved, banks didn't have to set aside as much money for loans expected to go bad. Experts say that likely won't be repeated to the same degree in coming quarters.
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