Top Banks See Originations Spike as Lower Rates Squeeze Interest Income
Refinances were 40% of originations in the third quarter, up from 19% in 2018's third quarter.
Lower interest rates swelled loan originations and shrank interest margins in the third quarter at two of the nation’s largest banks.
San Francisco-based Wells Fargo and New York-based JPMorgan Chase on Tuesday reported higher car and mortgage originations, but expect net interest income to decline further through the end of the year because of lower interest rates.
Each bank is larger than the entire $1.56 trillion credit union movement: Wells Fargo had $1.94 trillion in assets as of Sept. 30, up 4% from a year earlier. JPMorgan Chase had $2.76 trillion in assets as of Sept. 30, up 6%.
JPMorgan Chase expects its full-year net interest income to be at or below $57.5 billion, which presumes it will be flat in the fourth quarter at around $14.4 billion. For the third quarter, net interest income was $14.2 billion, up 2.3% from 2018′s third quarter. In the first half it was up 7.7%.
Wells Fargo’s net interest income fell 8% $11.6 billion in the third quarter. Its net interest margin was 2.66% in the third quarter, down from 2.82% in the second quarter and 2.94% in 2018′s third quarter.
But sagging rates also boosted originations for home and car loans, and strong consumer demand kept credit card balances rising.
JPMorgan Chase & Co. originated $32.4 billion in mortgages in the third quarter, up 44% from a year ago. For the first half, originations were flat (or down 0.5%) to $39.5 billion. Net revenue from home lending was $1.5 billion, up 12%, predominantly driven by higher net production revenue, largely offset by lower net interest income on lower loan balances.
Car lending did even better. Wells Fargo’s auto originations rose 45% to $6.9 billion “reflecting a renewed emphasis on growing auto loans following the restructuring of the business,” its news release said. Its portfolio balance rose 1% to $46.7 billion.
At JPMorgan Chase, auto loans and lease originations rose 12.3% to $9.1 billion, up from a 4.2% gain in the first half. Still auto loans on JPMorgan Chase’s balance sheet were $61.4 billion, down 4% from a year earlier.
Wells Fargo’s active credit card accounts rose 3% to 8.1 million as of Sept. 30. Its credit card customers held $39.6 billion in debt as of Sept. 30, up 5% from a year earlier as purchases rose 5% to $22.5 billion.
JPMorgan Chase credit cards held $159.6 billion in debt as of Sept. 30, up 8% from a year earlier as spending rose 10%.
By comparison, from August 2018 to August 2019 credit union balances grew 4.5% for car loans, 7.5% for real estate and 7.5% for credit cards.
Wells Fargo’s net charge-off rate of 0.27% for the quarter was near a historic low, and its non-accrual loans represented just 0.58% of total loans, the lowest level in 10 years. Wells Fargo had $5.5 billion in loans in non-accrual, down 17%.
JPMorgan Chase’s net charge offs rose 17% to $1.3 billion. Its net charge off rate was 1.16%, up 21 basis points. Loans in nonaccrual fell 12% to $3.1 billion.
Wells Fargo had $1.94 trillion in assets as of Sept. 30, up 4%. Its annualized return on assets was 0.95%, down from 1.31 in the second quarter and 1.27 in 2018′s third quarter.
JPMorgan Chase had $2.76 trillion in assets as of Sept. 30, up 6%. Its ROA was 1.30%, down from 1.41% in the second quarter and up 2 basis points from 2018’s third quarter.
Banks, as SEC filers, provide data that is far richer, timelier and more easily comparable in their financial reports than available from call reports posted by the NCUA. For example, while automobiles for about a third of credit union loans, credit unions are required to provide no data on car loan originations.
A few more details not to be found in NCUA call reports include the following from Wells Fargo:
- Wells Fargo received $85 billion in mortgage loan applications in the quarter, down from $90 billion in the second quarter but up from $57 billion in 2018′s third quarter.
- Refinances were 40% of originations in the third quarter, up from 19% in 2018′s third quarter.
- As a percent of applications, refinances were 50% in the quarter, up from 44% in the second quarter and 26% in 2018′s third quarter.
Wells Fargo has paid more than $15 billion in settlements since the financial crisis to resolve investigations into misdeeds. And it reported up front on Tuesday that in the third quarter those costs shaved $1.6 billion from income.