March 20, 2023

DealBook: Drop in Home Loans Takes Toll on Banks

Jamie Dimon, the chief executive of JPMorgan Chase, reported a 33 percent increase in first-quarter earnings on Friday.Larry Downing/ReutersJamie Dimon, the chief executive of JPMorgan Chase, reported a 33 percent increase in first-quarter earnings on Friday.

Wall Street knew the craze wouldn’t last.

The nation’s biggest banks, capitalizing on government efforts to bolster the housing market, have raked in handsome mortgage profits of late. On Friday, that started to change.

Wells Fargo, the nation’s largest home lender, disclosed that it originated fewer home loans and recorded lower mortgage banking income in the first quarter of 2013. JPMorgan Chase, the biggest bank by assets, reported limited appetite for new mortgages and a drop in mortgage banking income.

Since the 2008 financial crisis, the banks’ mortgage business had hinged on government intervention rather than fresh demand from consumers. When the Federal Reserve cut interest rates in recent years, it spurred millions of borrowers to refinance their home loans to reduce costs.

Now, as mortgage rates inch upward from their lows late last year and refinancing enthusiasm wanes, the pipeline of borrowers is drying up.

“You need a next level of people that are willing to buy and that simply isn’t there,” said J. J. Kinahan, a strategist at TD Ameritrade.

Banks are more optimistic, arguing that demand for new home mortgages will replace the refinancing frenzy. The banks, in predicting a continued housing recovery, point to their declining mortgage litigation costs and the increase in car lending and credit card spending.

John G. Stumpf, Wells Fargo's chief executive, posted a 22 percent rise in earnings for the quarter.John Adkisson/ReutersJohn G. Stumpf, Wells Fargo’s chief executive, posted a 22 percent rise in earnings for the quarter.

“People are buying cars, taking vacations and doing things to help fuel the economy,” John G. Stumpf, Wells Fargo’s chief executive, said in an interview. While noting that “the country has been through a shock” in the aftermath of the 2008 financial crisis, he argued that “you will see different loan categories start to grow.”

And despite the sluggish mortgage business, the banks showed broader signs of strength on Friday and managed to report record overall profits. JPMorgan posted a 33 percent jump in first-quarter earnings, to $6.53 billion, or $1.59 a share. Those results exceeded Wall Street analysts’ expectations of $1.40 a share.

Wells Fargo announced a 22 percent increase in earnings, to $5.17 billion, or 92 cents a share. The results outpaced estimates of analysts polled by Thomson Reuters, who had forecast earnings of 88 cents a share. For Wells, which is based in San Francisco, it was the 13th consecutive rise in quarterly earnings and the eighth consecutive record.

But revenue declined at both banks. And investors seemed skeptical about the banks’ returns. Shares in both banks fell, with JPMorgan dropping 30 cents, or 0.61 percent, to $49.01, and Wells Fargo sliding 30 cents, or 0.8 percent, to $37.21.

The results of both banks represented a turning point for their mortgage business. That business has been especially lucrative of late, as the banks pass on most loans to government entities like Fannie Mae and Freddie Mac, which guarantee the loans will be repaid. Armed with the guarantee, the banks package and sell the mortgages to investors for a significant profit.

The Federal Reserve has also stoked a refinancing boom after keeping interest rates at record lows. But the results on Friday signaled that those gains were unsustainable.

Underscoring a slowdown in refinancing, Wells Fargo said those loans accounted for 65 percent of mortgage originations in the first quarter, down from 76 percent in the period a year earlier. The bank’s mortgage banking income also slipped 3 percent, presenting potential problems for Wells Fargo, whose fortunes rise and fall with the mortgage market. And while handling $109 billion in mortgage originations might be a feat for some banks, it was a 16 percent drop for Wells Fargo.

JPMorgan’s mortgage originations actually soared 37 percent, but new loan applications slipped 8 percent from the fourth quarter. In total, the mortgage banking group posted a profit of $673 million for the first quarter, down 31 percent from a year earlier.

Still, JPMorgan’s chief executive, Jamie Dimon, struck a confident tone about the housing market.

“We are seeing positive signs that the economy is healthy and getting stronger,” Mr. Dimon said. “Housing prices continued to improve, and new home purchases are also starting to come back.”

He argued, however, that new regulations had clogged the lending spigot. The government’s lending standards remain too tough, he said, excluding some qualified borrowers from the market.

With the mortgage business in transition, the banks found other ways to burnish profits. For one, they cut expenses. Both banks also notched big gains in credit card and automobile lending. At JPMorgan alone, car lending grew 12 percent from a year earlier, to $6.5 billion.

JPMorgan’s results were also buoyed by gains in the investment banking business, where fees rose 4 percent, to $1.4 billion. The asset management business, which JPMorgan has expanded as regulations crimp other areas of the bank, reported net income of $487 million for the quarter, up 26 percent from a year earlier.

The gains were further fueled by JPMorgan’s decision to reduce reserves for mortgages and credit card loans. By moving money from the reserves, which cushion the bank against potential losses, the bank collected a net gain of 18 cents a share.

Addressing questions on Friday about whether the earnings are deceptively strong, Mr. Dimon said in a conference call that even after the reserve reductions, “we had really good numbers everywhere.”

At Wells Fargo, the strong returns were spread across the bank. Wholesale banking, which includes the sales and trading business along with the corporate lending division, reported that profits rose 9 percent. The bank also posted a 14 percent profit gain in its wealth management business. And profit in the community banking division, which includes Wells Fargo’s retail branches and consumer lending business, climbed 24 percent, to $2.9 billion.

“Wells Fargo’s diversified business model continued to produce outstanding results,” said Timothy J. Sloan, the bank’s chief financial officer.

A version of this article appeared in print on 04/13/2013, on page B1 of the NewYork edition with the headline: Drop in Home Loans Takes Toll on Banks.

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DealBook: HSBC Sets Aside $2 Billion for Legal Woes as Profit Falls

I very much regret HSBC's past failures and I apologize for them, the British bank's chief, Stuart Gulliver, said.Jerome Favre/Bloomberg News“I very much regret HSBC’s past failures and I apologize for them,” the British bank’s chief, Stuart Gulliver, said.

HONG KONG — Profit at HSBC Holdings dropped nearly 9 percent in the first half of the year, as the big bank deals with the fallout from a money-laundering investigation and a settlement over selling inappropriate financial products.

On Monday, HSBC said that it had set aside $700 million to cover the potential fines, settlements and other expenses related to a money-laundering inquiry in the United States. The bank made a further $1.3 billion provision toward a regulatory settlement related to payment protection plans for credit card loans, home mortgages and other consumer borrowings.

The legal woes weighed on the company’s financial results.

HSBC announced net income of $8.4 billion in the first half the year, down from $9.2 billion in the previous year. HSBC’s operating income rose slightly, to $43.6 billion, over the same period.

“I very much regret HSBC’s past failures and I apologize for them. Our controls should have been stronger and more effective,” the British bank’s chief executive, Stuart Gulliver, said Monday. ‘”We are committed to doing whatever it takes to make sure the organization is able to detect and prevent unacceptable behavior.”

Even so, HSBC’s final legal bills could rise.

On Monday, Mr. Gulliver indicated there was “tremendous uncertainty” around the money-laundering case, and the “number could be significantly higher.” He called the $700 million provision “a best estimate based on the facts that we currently know.”

Earlier this year, the United States Senate Permanent Subcommittee on Investigations issued a report accusing HSBC of serving as a conduit for money flowing illegally into the United States from Mexican drug traffickers and Middle Eastern banks with ties to terrorists. An outside audit identified nearly 25,000 transactions related to Iran involving more than $19 billion, which were handled by HSBC’s American unit but were not properly disclosed to American regulators

HSBC has also been ensnared by the rate-manipulation inquiry, along with other big global bank. The multiyear investigation centers on benchmark rates, including the London interbank offered rate, Libor, and the Euro interbank offered rate, Euribor.

Last month, Barclays paid $450 million to authorities for submitting false rates. Global banks may have to pay more than a combined $20 billion in fines and penalties related the investigation, according to estimates from analysts at Morgan Stanley.

HSBC said that it had made no provision for potential fines or regulatory settlements related to the global investigation.

“It’s far too soon to make any estimate on Libor or Euribor,’’ Mr. Gulliver said. ‘‘We are providing information to various regulators simply because we are a panel bank, and therefore we don’t have any information that gives us any ability to make a provision for future costs that may result from anything do with Euribor or Libor.’”

Despite the continued legal problems, HSBC’s underlying businesses are showing signs of strength. During the first three months through June 30, the bank reported that pretax profit rose 28.1 percent to $8.42 billion compared with same period a year earlier.

According to HSBC, Asia continued to be an ‘‘absolute powerhouse’’ for the bank’s growth, accounting for half of pretax profit in the second quarter. Pretax earnings from Hong Kong and the rest of Asia rose 16 percent in the second quarter to $4.2 billion.

Since taking over as the bank’s chief executive in January 2011, Mr. Gulliver has focused on cutting costs, selling less-profitable businesses and focusing new investment on faster-growing economies of Asia.

Over that time, HSBC announced more than 36 deals to reduce or dispose of its stakes in a wide range of businesses around the world. Last week, the bank struck an agreement to sell its 44 percent share in Global Payments Asia-Pacific, a card processing joint venture, for $242 million.

In August 2011, the bank announced a plan to slash 30,000 jobs by 2013, part of an effort to cut costs globally by $2.5 billion to $3.5 billion. On Monday, HSBC said the number of full time staff globally had fallen to 272,000 people in the second quarter, down 8 percent from 296,000 people a year earlier.

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DealBook: British Official Backs Central Bank’s Role in Rate Scandal

3:53 p.m. | Updated

Paul Tucker, a Bank of England official, testified before a British parliamentary committee on Monday.BBCPaul Tucker, a Bank of England official, testified before a British parliamentary committee on Monday.

LONDON – Under sharp questioning by political leaders on Monday, Paul Tucker, the deputy governor of the Bank of England, defended the central bank in light of the interest rate manipulation scandal that has engulfed Barclays.

Mr. Tucker rebutted allegations by Barclays’ officials that the central bank was well aware of the manipulation of rates and did nothing to stop it.

Robert E. Diamond Jr., the former chief executive of Barclays, resigned because of the scandal and told the same committee last week that senior government officials had been repeatedly told about efforts to influence key interest rates but did nothing to intervene.

Mr. Tucker testified that while senior officials had maintained regular contact with senior managers at Barclays after the collapse of Lehman Brothers in 2008, he was not informed of the effort to manipulate the London interbank offered rate, or Libor. The rate is used as a benchmark for trillions of dollars of corporate loans, home mortgages and derivatives around the world.

“I was not aware of allegations of lawbreaking until the last few weeks,” Mr. Tucker said during more than two hours of questioning.

Mr. Tucker, who is a front-runner to replace Mervyn A. King as the head of Britain’s central bank next year, appeared confident in the initial part of his testimony, but became increasingly anxious as politicians queried him on his role in the scandal.

He added that the Bank of England had continued to use the rate to underpin its multibillion-dollar credit facilities for local banks throughout the financial crisis. The British government lent firms more than $310 billion as part of its so-called Special Liquidity Scheme from 2008 to 2011.

Despite the Bank of England’s actions, British politicians criticized Mr. Tucker for not taking a more active role in policing. When asked by politicians whether he was confident that the Libor manipulation had now stopped, Mr. Tucker wavered.

“I can’t be confident about anything after learning about this cesspit,” he replied.

Barclays agreed in late June to pay about $450 million to settle accusations from United States and British authorities that its traders and senior executives had manipulated the rate.

Amid concerns that senior officials may have directed Barclays to alter its Libor submissions, British politicians on Monday focused their questioning on a conversation Mr. Tucker had with Mr. Diamond at the end of October 2008.

In his testimony, Mr. Tucker said the worries from authorities were linked to fears that the financial markets might perceive Barclays to be at risk if its Libor submissions continued to be higher than those of other international banks.

The British official said his phone call to Mr. Diamond was to remind the Barclays chief that people in the markets were questioning whether the British bank had access to financing.

“I wanted to make sure that Barclays’ day-to-day funding issues didn’t push it over the cliff,” Mr. Tucker said.

E-mails released by the Bank of England before Mr. Tucker’s testimony revealed that senior British officials were worried about banks’ access to the financial markets in the aftermath of the collapse of Lehman Brothers.

“We are [very] concerned that U.S. rates are tumbling but we remain stuck,” Jeremy Heywood, a senior British civil servant, told Mr. Tucker in an e-mail on Oct. 22, 2008.

Mr. Tucker also was in almost daily contact with senior Barclays executives during the final weeks of October, 2008, according to the documents.

“These were completely extraordinary times,” Mr. Tucker said. “Two banks had been taken under the government’s wing, so Barclays was next in line.” During that period, the British government provided multibillion-dollar bailouts for Royal Bank of Scotland and Lloyds Banking Group.

He contacted Mr. Diamond on Oct. 25, 2008, saying he was “struck” that Barclays was paying a high interest rate on its loans, even though they were backed by British government guarantees. Mr. Tucker also asked to meet Mr. Diamond to discuss the financing issues.

A few days later, Mr. Diamond sent a separate e-mail to the Bank of England deputy governor with details of a 3 billion euro ($3.7 billion) bond that Barclays had issued, in an effort to quell officials’ fears that the British bank was having financing problems.

“Investor confidence is slowly (very slowly) returning,” Mr. Diamond wrote on Oct. 30, 2008.

The European Commission also waded into the fray on Monday after Michel Barnier, the financial services commissioner, said he would propose amendments to draft market abuse legislation that would outlaw the manipulation of Libor and other benchmark rates.

Mr. Tucker’s testimony was seen as being pivotal to his future career path. Mr. Tucker, 54, has been with the Bank of England for more than 30 years.

After working briefly at the British bank Baring Brothers and with the Hong Kong government in the 1980s, Mr. Tucker rose inside the Bank of England to become the central bank’s deputy governor in charge of financial stability in 2009.

He also is a leading figure in global efforts to overhaul financial regulation, holding senior positions at both the Financial Stability Board and the Global Economy Meeting, whose memberships comprise officials from the world’s leading central banks.

Mr. Tucker is known for his practical knowledge of the financial markets as well as for a track record of backing extra support to finance British banks during the recent economic crisis, according to several of his current and former colleagues, who spoke on the condition of anonymity.

Yet the Libor scandal has hurt Mr. Tucker’s reputation. Individuals connected to the Bank of England have voiced concerns that he missed signs that rate manipulation was happening.

In November 2007, for example, Mr. Tucker headed a committee meeting at the central bank in which, according to the meeting’s minutes, some officials raised questions that banks were submitting lower Libor rates than what they could obtain from the market, a process called lowballing.

“This doesn’t look good, Mr. Tucker,” Andrew Tyrie, the chairman of the parliamentary committee, said. “In these minutes, we have what appear to any reasonable person as the lowballing of rates.”

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At Bank of America Merrill Lynch, Profits but No Joy

Only this was no gag. The caller was telling a banker in Chicago that none other than Mr. Buffett wanted to reach the chief executive of Bank of America, ASAP.

The hurried deal that emerged from that early-morning call in late August underscored Bank of America’s predicament: It was the too-big-to-fail bank that, to some, also seemed too big to succeed.

Its C.E.O., Brian T. Moynihan, has been struggling to fix things for almost two years. After the financial markets turned on the company this summer, Mr. Buffett invested $5 billion, arresting a precipitous decline in Bank of America’s share price.

But not even the imprimatur of the Oracle of Omaha has been enough to dispel the clouds. Despite the billions from Mr. Buffett, and tens of billions in asset sales, Bank of America can’t seem to find its way.

The situation has set teeth on edge at its headquarters in Charlotte, N.C. But perhaps nowhere is the grumbling louder than in Midtown Manhattan, at One Bryant Park, now the base of the Wall Street bank formerly known as just Merrill Lynch.

When Merrill collapsed into the arms of Bank of America in late 2008, the deal remade the face of Wall Street. Merrill, with its “Thundering Herd” of rough-and-tumble stockbrokers, was now reporting to more formal Southern bankers in Charlotte. No sooner was the deal done than gaping losses at Merrill threatened to drag down Bank of America. Washington stepped in with the second of two federal bailouts.

Nearly three years later, taxpayers have been repaid, with interest, and what is now Bank of America Merrill Lynch is doing surprisingly well. But the company as a whole is groaning under the weight of many billions of dollars in bad home mortgages, most of them inherited from Countrywide Financial, which it acquired in 2008.

Bank of America’s stock, down 54 percent this year, is the biggest loser in the Dow Jones industrial average.

The irony is not lost on bankers, brokers and traders at One Bryant Park. The billions of dollars that Bank of America Merrill Lynch is earning from its businesses on Wall Street are being wiped out by the red ink flowing out of Countrywide. Bonuses are on the line. So are jobs.

“It’s debilitating and depressing,” says one Merrill veteran, who insisted on anonymity because he was not authorized to speak publicly. “People are very angry. How could we not be?”

Many Americans who don’t work in the financial industry — people who are struggling to make ends meet, or to find jobs, or to keep them — are more than angry. But this is Wall Street, where money is the measure and where, even in this post-bailout era, top producers expect to be paid, and paid well.

In hindsight, many agree that Mr. Moynihan’s predecessor, Kenneth D. Lewis, paid too much for Merrill Lynch: $50 billion in stock. The outcry over the deal and subsequent bailout led to investigations by state and federal regulators. A lawsuit brought by Bank of America shareholders contends that Bank of America tried to keep the losses at Merrill quiet, and seeks $50 billion in damages.

So it might come as a surprise that Bank of America Merrill Lynch is actually thriving. Measured by fees collected for Wall Street work, it is second only to JPMorgan Chase and well ahead of Goldman Sachs and Morgan Stanley.

The global banking and markets unit of Bank of America, which includes many of the operations it acquired in the Merrill merger, earned $3.7 billion in the first half of 2011. With help from the Thundering Herd, the bank’s assets under management have increased to $2.2 trillion from $2 trillion in the last year, despite the turbulence in the financial markets.

AT One Bryant Park, all of this comes as cold comfort.

Many bankers and traders typically receive at least half of their pay in the form of restricted stock. In recent years, Bank of America has made such awards when its share price was trading upwards of $14. With the price now at $6.12, anyone who got shares has essentially suffered a big pay cut since they were handed out, mostly because of the problems associated with Countrywide, the subprime lender whose excesses came to symbolize the housing bubble.

Executives at Bank of America Merrill Lynch concede that they have a big mountain to climb.

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