JPMorgan's Earnings Quietly Signal Housing Rebound

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NEW YORK (TheStreet) -- As a signal of the economy, Main Street may trump Wall Street in JPMorgan Chase's second quarter earnings.

Hidden within earnings that contained a 'London Whale' trading loss, which shaved shaved $4.4 billion from JPMorgan Chase's $5 billion second quarter profit is a crucial sign of a housing rebound.

In spite of reporting earnings colored by a trading loss at JPMorgan's Chief Investment Office and a $459 million restatement of first quarter earnings, a surge in lending at JPMorgan's mortgage unit and similar second quarter results from Wells Fargo bode well for the recovering housing market.

Amid recovering new and existing home sales, JPMorgan said that its mortgage loan origination revenue grew nearly 30% year-over-year and 14% sequentially to $43.9 billion. Wells Fargo's mortgage also grew in the second quarter and nearly doubled relative to year-ago levels, reinforcing what may be a widespread recovery in the housing market.

For both banks, mortgage lending stood out as a strong point in a generally weak quarter for revenue, as interest-based earnings declined.

JPMorgan reported adjusted second quarter earnings of $1.09 a share, beating estimates, on higher than expected revenue of $22.9 billion. However, the bank benefitted from a one-time $2.1 billion release of loan loss reserves at its consumer lending operations, which outweighed investment banking unit results that were in-line with expectations.

Overall, the bank reported a second-quarter profit of $5 billion, down 9% from this time in 2011.

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Analysts polled by Bloomberg had estimated that the bank would earn 76 cents in EPS on $21.6 billion in revenue. Excluding accounting gains on the widening of its credit spreads, JPMorgan's profit was $1.09, beating estimates; however that number included 42 cents in one-time EPS gains from loan-loss reserve cuts and a Bear Stearns-related gain.

Stifel Financial analyst Christopher Mutascio said that excluding one-time items the bank's core EPS performed at a 'run-rate' of $1.35, highlighting JPMorgan's $2.27 billion in mortgage banking earnings as one of the bank's clearest earnings beats. Expenses of $14.97 billion, beat expectations added Mutascio, in a note to clients.

While JPMorgan's earnings were boosted by top-line mortgage origination growth, the bank also benefitted from an improvement in the expected loss on its existing loans. JPMorgan's benefitted from a one-time $2.1 billion release of loan loss reserves at its consumer lending operations, which outweighed investment banking unit results that were in-line with expectations.

On a call with investors, JPMorgan chief financial officer Douglas Braunstein also said loan loss reserve releases are likely to continue as credit quality in the banks' mortgage lending operations improve.

"We continue to be conservatively and appropriately reserved," said Braunstein, who noted that credit card related reserve releases are mostly over.

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Those releases of earnings set aside to manage loan defaults may help JPMorgan offset declining interest-rate based earnings.

"JPM's loss reserve remains one of the strongest of any major US bank," wrote Miller Tabak analyst Thomas Mitchell, in a Friday note.

JPMorgan reported a 4% reduction in its net interest income to $11.15 billion, and a decline in those margins to 2.47%, which wiped out the benefit a modest increase in deposits at the nation's largest bank, according to RW Baird analyst David A. George. Improving credit quality across 'all major loan categories' drove JPMorgan's reserve release, Baird's George added in a note to clients.

JPMorgan's mortgage growth and credit improvements were matched by Wells Fargo, signaling widespread improvement in the thawing housing market.

"While the economic recovery remains uneven, we continued to meet our customers' financial needs and benefited from signs of stabilization in the housing market," said Wells Fargo chairman and CEO John Stumpf.

In a CNBC interview on Thursday, Warren Buffett said that while economic growth has fallen to a standstill, he is seeing a pickup in residential housing, in a comment on the economy that may also be reflected in bank earnings.

"The general economy in the United States has been more or less flat, and so the growth has tempered down. But the residential housing, we're seeing a pickup. It's noticeable. It's from a very low base," said Buffett, who noted that his tempered optimism was a 'flip-flop" from his outright bullishness on housing in 2011.

Still, even as JPMorgan sees some of its businesses most tied to the U.S. economy improve, questions are likely to remain about its trading losses. In a call with investors, JPMorgan CEO Dimon called the construction of the banks' Chief Investment Office unit a 'mistake.'

"CIO was a mistake and we are sorry," Dimon said on the special two-hour call to disclose what now stands as a $5.8 billion CIO unit trading loss.

For now investors appear to be breathing a sigh of relief. "The key story is that the CIO "whale loss" is within expectations and mostly complete. This overhang is now largely removed and bodes well for the company as it refocuses on the underlying businesses," wrote Oppenheimer analyst Chris Kotowski, in a note to clients.

In Friday afternoon trading, JPMorgan shares surged over 5% to $35.89, while Wells Fargo rose over 3% to $33.89.

For more on the contrasts between JPMorgan and Wells Fargo's earnings and business models, see why Warren Buffet shuns investment banks.

-- Written by Antoine Gara in New York

Tickers in this article: JPM WFC