Banks' biggest problems have officially moved to the top of their balance sheets.
JPMorgan Chase & Co., which kicked off the third-quarter earnings season Wednesday, sent that signal in reporting anemic revenue for the second straight quarter. Profits exceeded expectations primarily because fewer homeowners and credit-card holders missed payments.
Though the New York lender's credit costs fell to their lowest point in two years, almost every top-line item has been static for six months. Regulatory changes are squeezing deposit fees. The volatile capital markets have depressed trading revenue. Interest income is shrinking thanks to contracting loan balances. Plummeting interest rates are pressuring margins now that deposits are as cheap as they can get.
A half-year spell of soft revenue is bad for JPMorgan Chase and could be ominous for other banks that aren't as healthy or diverse, experts said.
"Everyone talks about normalized earnings. [Banks] are not going to get there without a top line," said Michael Block, chief equities strategist with Phoenix Partners Group LP in New York. "Show us the revenues. I think it's a huge problem."
Just how big of a problem will become clearer as other large and midsize banks begin reporting earnings next week, including Citigroup Inc. on Monday and Bank of America Corp. on Tuesday.
JPMorgan Chase reported revenue of $24.34 billion, down 5% from the prior quarter and 15% from a year earlier.
Since JPMorgan Chase has a hand in almost every facet of the banking, analysts and investors said they expect the broad trends in its financial results — weak revenue, shrinking loans, improving credit losses — to be a harbinger of the industry's performance for the foreseeable future.
"How are they going to generate core earnings if their asset base, their loan base, is declining and their net interest margin is declining?" asked Keith B. Davis, an analyst with Farr Miller & Washington in Washington. "The longer-term revenue drivers are still in question."
Easing credit costs can only boost earnings for so long, Davis and other market watchers said. At some point, banks will have to start making money doing what banks are supposed to do: collect fees and interest making new loans to consumers and businesses.
"It's about growing the balance sheet — they need more loans," said Roger Lister, chief credit officer for DBRS Ltd., a Toronto credit rating agency.
JPMorgan Chase's assets did indeed grow in the second quarter — from investing in more securities. But total loans fell for the third straight quarter, to $690.5 billion.
For his part, JPMorgan Chase Chief Executive Jamie Dimon acknowledged the toll that shrinking loans can take on revenue. But he said that may not be bad for the overall health of the company.
Runoffs of large portfolios of credit cards and mortgages could take years, but that "frees up capital" that the company can invest in other areas, the CEO said.
"We're not losing potential earnings. We can go do something else with it," Dimon told analysts in a conference call.
"It leads to negative revenues," he said. "But it does not necessarily lead to negative profits."
JPMorgan Chase is also making substantial new loans, Dimon said. Automotive and mortgage originations rose in the quarter, and demand for new loans rose slightly in the commercial bank, he said.
"We're starting to see signs of life," in the commercial bank, he said. It could have "some growth" in the next "three to six months."
The commercial bank's loans rose 1% from the previous quarter, to about $97 billion, because of increases in commercial term and middle-market lending.
Experts said the slight increase could indicate that corporations that have been tapping the capital markets for debt may be increasing their appetite for bank loans.
Mixed results in JPMorgan Chase's other business lines have implications for other banks and the broader economy.
The retail bank's revenue fell on lower deposit and loan fees.
Though mortgage originations were higher than they have been in a year, that news was overshadowed by the $1 billion the company set aside to cover faulty mortgages that it must repurchase from Fannie Mae and Freddie Mac. It also set aside another $1.3 billion to cover future mortgage-related litigation.
Those expenses — together with the 115,000 foreclosure decisions that the company is reviewing for processing errors — underscored the substantial uncertainties banks face in the housing industry.
Though mortgage losses fell for the fourth straight quarter on stabilizing home prices and delinquencies, JPMorgan isn't ready to start drawing down the $14 billion it has set aside to cover bad mortgages.
Company officials, meanwhile, defended decisions to seize homes as legitimate.
Chief Financial Officer Doug Braunstein told analysts that the company's foreclosures were "justified by the facts and circumstances" despite any filing mistakes that may have occurred.
Dimon downplayed the impact of the foreclosure controversy. "It will cost us some money to go back and make sure it's done right; it will delay some foreclosures," Dimon said, according to Bloomberg News. "But the whole mortgage issue costs us so much money now, to me it will be incremental."
The credit card business posted its second straight profitable quarter as fewer borrowers missed at least a month of payment for the third time in a row. That enabled the company to take down $1.5 billion it had set aside to cover credit card losses and count as income. But credit card balances continue falling and fees and net interest income were down notably from a year earlier.
Investment banking profits declined for the second straight quarter as a result of a slowdown in debt and equity underwriting.