JPMorgan and Wells Fargo Announce Record Profits

As the housing market recovers, America’s biggest banks are making a killing—and ignoring pesky lawsuits.

10.12.12 3:00 PM ET

You can slam them. You can sue them. You can even try to split them up. But the big banks won’t care. On Friday morning, both JPMorgan and Wells Fargo, America’s two most valuable banks, reported record profits, as their mortgage-lending businesses rode the housing recovery to new highs. JPMorgan reported $5.71 billion in net profits in the third quarter—a 33 percent increase from the third quarter of 2011 and well above analyst expectations. Wells Fargo, the nation’s biggest home lender, brought profits up 22 percent from the third quarter of 2011 to a record $4.94 billion.

The earnings reports give some of the best bottom-line evidence yet for the housing comeback. As a cheery Jamie Dimon, JPMorgan CEO, put it, “The housing market has turned the corner.” The bank’s revenue from mortgage lending rose a whopping 36 percent from last quarter. The numbers show the bank originated 29 percent more home loans year over year. JPMorgan made most of its housing gains—“about 75 percent,” said Dimon—on refinanced mortgages. That’s a good sign that homeowners are getting back on their feet and opening up new lines of credit.

If the Federal Reserve’s new round of unlimited-asset purchases—its third round of quantitative easing—does its job and keeps rates low, that trend is likely to continue. Dimon was circumspect. “I’m not sure it [QE3] will ... drive the economy ... Fiscal policy is going to be more important than Fed policy.”

Despite uncertainty in Europe, the bank’s international business also improved, with overseas lending up 25 percent year over year. And the “London Whale” damage, the shambolic trades that embarrassed the bank and led to a $6 billion charge last quarter, seems to have healed. JPMorgan said that the CIO division responsible for the botched hedge only “experienced a modest loss” this quarter, and that its assets have now almost all been transferred to the investment banking unit. There the news was great. Fees for stock and debt underwriting went up 15 percent, a good sign that businesses are getting back to making deals in the recovering economy.

On top of the boosted revenue, the bank also quietly put away $684 million in litigation reserves. At the start of this month, New York Attorney General Eric Schneiderman filed suit against JPMorgan, alleging loan fraud at Bear Stearns, the crisis-cratered firm that Dimon purchased with government assistance in 2008.  Dimon took an existentialist tone. The suit “is going to make it much harder in the future for companies to buy a troubled company ... It’s unfortunate. But that’s life.” And life’s a lot easier when your bank makes $5.71 billion in three months.

Across the country at San Francisco–based Wells Fargo, news was also good. Though the bank just missed revenue expectations, its $4.72 billion quarterly income marked a new record. Again, the gains were almost all housing-related. Income from mortgage banking accounted for $2.81 billion—about 60 percent of the bank’s profits and up 53 percent from this time last year. Mortgage originations were $139 billion, up $8 billion from last quarter and $50 billion from a year ago. In the aftermath of the crisis, Wells Fargo has quietly emerged as a mortgage powerhouse.

With all this good news, Wells Fargo can afford not to sweat the small stuff: that is, the federal government’s lawsuit, announced this week, claiming that Wells blew hundreds of millions in Federal Housing Administration insurance on bad home loans. Even with maximum damages, the bank’s profit position—and room for growth—will mitigate the pain. And this quarter, its operating losses have already declined $243 million on lower litigation expenses. In this climate, both JP Morgan and Wells Fargo can afford some minor-crisis cleanup.

As luck would have it, this month marks the beginning of Wall Street campus recruiting season. The Ivy League will swarm with Loro Piana, as just-graduated analysts stake out their soon-to-be-replacements. With results like this morning’s, they’ve got a much stronger case. Hundreds of miles from Cambridge, New Haven, and Philadelphia, ailing American mortgages are being refinanced like never before. The pain of the mortgage bubble—and JPMorgan and Wells Fargo’s shared role in inflating it—may soon be a distant memory. The banks that blew the housing market during the bubble now stand to gain the most from its recovery. So, big profits, happy analysts, and chest-thumping CEOs—things might just be returning to normal.