JPMorgan Chase & Co. (JPM), U.S. Bancorp (USB): Higher Rates Mean Higher Returns for These Banks

U.S. Bancorp (NYSE:USB)’s revenues from mortgage banking are driven by mortgage origination volumes, which are dependent on the mortgage rates. Lower rates encourage more borrowing. Higher rates discourage mortgage applications. However, there is a lag between mortgage applications and the closing of the mortgage. This is called origination. U.S. Bancorp (NYSE:USB)’s CFO says that this lag will enable the bank to report higher originations during the second quarter compared to the prior quarter.

However, the CFO admits that mortgage applications coming from refinancing have slowed down. He expects the refinance share to plunge to 60% from the prior quarter’s 70%.

Dimon has a positive outlook on the US economy with some concerns about Europe. However, he believes the big corporations in the US are doing well, and consumers are paying down their debt. Therefore, the bank’s mortgage business should continue to do well despite a hike in mortgage rates.

While higher interest rates have caused refinancing volumes at JPMorgan Chase & Co. (NYSE:JPM) to slow down during the second quarter, mortgage origination have not been affected that much. Further, mortgage delinquencies at JPMorgan Chase & Co. (NYSE:JPM) are expected to decline at a rapid pace. This should result in more reserve releases. Dimon expects $1 billion in mortgage releases this quarter while another $1 billion set aside for credit card losses will also be released as consumers rapidly pay down their debt.

All is not well for JPM

Earlier this week S&P, one of the largest US credit rating agencies, downgraded JPMorgan’s long-term outlook as negative and termed the bank “systemically important.” It also said that the need for extraordinary government support in the event of another crisis is diminishing. Another one or two level downgrade can be expected for JPMorgan if S&P entirely removes the assumption of government support from its criteria.

This downgrade brings JPMorgan in line with seven other banks, including Bank of America Corp (NYSE:BAC) and Goldman Sachs Group Inc (NYSE:GS). However, S&P is clear that the US government support for “too big to fail” is waning.

Conclusion

The second quarter of the current year is marked with higher Treasury yields and mortgage rates. While this might be a concern for some banks, it is definitely not for JPMorgan, Wells Fargo & Co (NYSE:WFC) U.S. Bancorp (NYSE:USB). Therefore, I recommend investors buy the stocks before the rates go even higher.

Adnan Khan has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of JPMorgan Chase & Co (NYSE:JPM). and Wells Fargo. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Higher Rates Mean Higher Returns for These Banks originally appeared on Fool.com is written by Adnan Khan.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.