Banks See A Bright Side In Dour Numbers

When JPMorgan Chase and Wells Fargo announced first-quarter profit declines of 49% and 11% today, executives from both banks tried to emphasize that the bad news was masking the good. To hear them tell it, the lingering credit crisis and the harsh toll it has exacted on U.S. banks are the very scenario these two companies have been waiting for.
Sure, losses from business and consumer loans, including prime mortgages, are accelerating and only expected to worsen as the year goes on. Not much of a surprise, of course, but the numbers are stunning. At JPMorgan, credit costs rose 61% from the same period last year, to $5.1 billion. At Wells Fargo, a $2 billion provision was three times greater than last year.
JPMorgan, which in addition to being a big mortgage and credit card lender, is the top arranger of leveraged loans, wrote down $1.6 billion worth of exposure, mostly to leveraged loans it still hadn't sold off its books. Exposure was $22.5 billion at the end of March, down just $3 billion from the end of last year.
But while rivals, including Citigroup, are courting private equity investors and others to buy bundles of leveraged loans at a discount, just to move them off their books, JPMorgan, which suffered less because it didn't have the massive exposures to credit derivatives holdings other banks had, views the market disruption as an opportunity.
During the quarter it added $3 billion in new leveraged loan commitments in markets that are otherwise crippled with uncertainty. "We're still open for business," JPMorgan Chief Executive James Dimon said on a conference call Wednesday.
The upbeat tone of the earnings reports Wednesday contrasts with the gloomy mood set Monday, when Wachovia surprised the market with a $393 million loss owing to $2 billion in market-related losses. The Charlotte, N.C., firm is feeling the heat of its ill-timed move into the California mortgage market through its acquisition of adjustable rate lender Golden West Financial in 2006.
Citigroup and Merrill Lynch are also set to report disappointing results this week, with some predicting another round of massive write-downs.
JPMorgan, meanwhile, is in the process of taking over Bear Stearns after its collapse last month, but that doesn't rule out other acquisition possibilities. It is said to have looked at acquiring Washington Mutual, the faltering Seattle thrift that recently arranged a $7 billion capital infusion from Texas Pacific Group. "You should assume we look at everything," Dimon said without commenting specifically on talks with Wamu.
Wells Fargo, based in San Francisco, has also seen its share of challenges and opportunities. It is massively exposed to the California real estate market, writing off $1.5 billion in loan losses, up from $715 million in the first quarter last year. It has $84 billion in home equity loans looming, more than one-third extended to Californians, and is trying to sell off some of that exposure.
But its revenues rose 12% during the quarter, to $10.6 billion. Ironically, mortgage refinancing activity is driving its business. Wells took in $132 billion in mortgage applications in the quarter, the most since the refinancing boom of fall 2003.
"We're very excited about our opportunities to continue to gain market share," said Chief Executive John Stumpf in a statement, "at a time when many of our competitors are struggling." Take that Wachovia.


Article by Liz Moyer Taken from Forbes.com