Mortgage boom lifts US banks

After a lacklustre few quarters due to a struggling economy and choppy markets, third-quarter earnings at American banks proved better than expected. JPMorgan Chase reported a 36% year-on-year jump in profits to a quarterly record of $5.3bn. Wells Fargo, the biggest mortgage lender, made $4.7bn, also a record.

Goldman Sachs bounced back from a poor third quarter in 2011, thanks to a strong performance by its investment banking and trading divisions. Citigroup’s underlying profits rose by 27% to $3.3bn. Citigroup’s CEO Vikram Pandit suddenly stepped down, accompanied by chief operating officer John Havens.

What the commentators said

The banks remembered “the first rule of post-crisis banking”, said Lex in the FT. When the Federal Reserve is “spraying money around, get in the way”. The Fed has pledged – and has just started – to buy mortgage debt with printed money until the economy improves.

Along with previous quantitative easing programmes, this has driven mortgage rates down to record lows. The rise in house prices and a slight easing in lending standards have also helped spur a refinancing boom. Banks are earning more in fees by writing more mortgages while also earning money from packaging up the mortgages and selling them on. The Fed’s mortgage security buying is driving up prices for these bundles.

Meanwhile, Pandit’s exit “restores the air of calamity that dogged Citigroup” during and after the credit crunch, said Tom Braithwaite in the FT. Earlier this year, the bank ended up at loggerheads with the Federal Reserve. It said that Citigroup’s plan to buy back stock or pay a higher dividend would unduly weaken its capital positions. Then shareholders revolted against executive pay. Finally, Citigroup sold its stake in retail brokerage Smith Barney too cheaply.

Given all this, while his departure certainly wasn’t expected to be this sudden, it seems he “succumbed to a basic rule”, said Rob Cox on Breakingviews: “three strikes and you’re out”. More fundamentally, added Nils Pratley in The Guardian, it’s still not clear what Citigroup is for. For all the talk of going back to banking basics, it’s still “a sprawling and disjointed empire”.

Merryn

Claim 12 issues of MoneyWeek (plus much more) for just £12!

Let MoneyWeek show you how to profit, whatever the outcome of the upcoming general election.

Start your no-obligation trial today and get up to speed on:

  • The latest shifts in the economy…
  • The ongoing Brexit negotiations…
  • The new tax rules…
  • Trump’s protectionist policies…

Plus lots more.

We’ll show you what it all means for your money.

Plus, the moment you begin your trial, we’ll rush you over THREE free investment reports:

‘How to escape the most hated tax in Britain’: Inheritance tax hits many unsuspecting families. Our report tells how to pass on up to £2m of your money to your family without the taxman getting a look in.

‘How to profit from a Trump presidency’: The election of Donald Trump was a watershed moment for the US economy. This report details the sectors our analysts think will boom from Trump’s premiership, and gives specific investments you can buy to profit.

‘Best shares to watch in 2017’: Includes the transcript from our roundtable panel of investment professionals – and 12 tips they’re currently tipping. The report also analyses key assets, including property, oil and the countries whose stock markets currently offer the most value.