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5 things to watch when Bank of America, Wells Fargo report earnings

Bank earnings season is here again, and the third quarter's results could shed some light on a period of significant transition for the nation’s big banks as they cope with a slowdown in the mortgage business.

Wells Fargo joins JPMorgan Chase in reporting earnings on Friday. Bank of America releases its results next Wednesday.

Here are five things to watch when they do:

1) How big a drag will the mortgage business be?

For more than a year, record low mortgage rates led millions of people to refinance their home loans. Big banks like Wells Fargo and Bank of America hired thousands of people to process all these applications.

But back in March, those mortgage rates started to climb and refinances slowed to a trickle. The impact on bank earnings should be significant, especially at Wells Fargo.

Mortgage banking revenue at the San Francisco bank could be off as much as 25 percent, some analysts predict. That’s going to jeopardize the bank’s streak of nine consecutive quarters of record earnings.

Bank of America doesn’t have the volume of mortgages that Wells does, but the Charlotte bank was much more concentrated in refinancings than Wells. So it should also see its earnings affected.

2) Will Wells Fargo be able to make money elsewhere?

Wells Fargo executives have regularly been asked how they’ll keep up their profits when the mortgage business wanes. And they’ve always brushed aside the question with a little metaphor: The bank is like an iconic Wells Fargo stagecoach, pulled by 90 horses. Each represents one of the bank’s lines of business. When one horse falters, another will pull harder, CEO John Stumpf says.

Well, it looks like the mortgage horse will have finally slowed down. Investors will be looking to see which other businesses will step up.

3) How far did the banks cut? And what's left to come?

As the mortgage business has slowed, both banks have laid off thousands of staffers they had brought on over the past few years. Wells Fargo has laid off at least 4,800 of its loan processors, including several hundred in Charlotte. Bank of America has laid off more than 2,000. On earnings day, executives are likely to indicate whether more will be coming.

Bank of America has also been cutting expenses across the company more broadly, as part of CEO Brian Moynihan’s Project New BAC, named after the bank’s ticker symbol. They’ve also been working through the hundreds of thousands of delinquent loans on their books, and cutting servicers along the way. Analysts have written that they anticipate the Charlotte bank will show more progress on both of those.

4) Will executives talk about Washington impact?

A group of financial industry executives, including Moynihan, went to Washington D.C. last week to try to persuade lawmakers to reach a deal to avoid a federal government debt default. And the ongoing government shutdown is also sending ripple effects through the economy. Executives at both banks might give a preview of how that might affect their companies.

5) What's Bank of America's litigation outlook?

Bank of America has continued to wade through dozens of lawsuits, legal claims and government investigations, primarily related to their mortgage business. Investors have also regularly cited the uncertainty around the bank’s legal problems as a reason they’re hesitant to invest. The bank has occasionally made legal settlement announcements in conjunction with earnings reports. They’re also sure to be asked just how much legal liability is left.

Dunn: 704-358-5235; Twitter: @andrew_dunn
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