Both banks reported double-digit increases in third-quarter earnings on Friday, as record-low interest rates and an uptick in the housing market drove a boom in mortgages.

But analysts said those record earnings might not be sustainable, as each bank posted declining margins that suggest they may have a harder time earning as much in the future.

J.P. Morgan shares closed the day down 1.1 percent at $41.62, while Wells Fargo declined 2.6 percent to $34.25. Both underperformed the broader market, which was essentially flat.

The issue is the "net interest margin," or the spread between what the banks earn from loans and what they pay out on deposits. That margin contracted in both cases.

"You have a battle between net interest margin and mortgage banking," said Marty Mosby, an analyst at Guggenheim Securities, referring to the tension between profit-drivers now and potential future results.

MORTGAGES ON THE MOVE

The mortgage market dragged on banks during the worst of the financial crisis but has become a bright spot of late. After the Federal Reserve said in September it would buy huge quantities of mortgage bonds every month for the foreseeable future, rates fell sharply and loan applications soared.

Wells Fargo, by far the largest mortgage lender in the country - three times the size of its closest peer - made $139 billion in mortgages in the three months ending in September, up $50 billion from a year earlier.

There is a limit to that growth, though, warned J.P. Morgan Chief Executive Jamie Dimon.

"We don't expect to count on high margins and mortgage origination forever," Dimon said on Friday. The refinancing trend, he added, will continue "next quarter, maybe for a couple of quarters after that, but it won't last much longer."

SMALLER WHALES

Besides the good news about the housing market, J.P. Morgan also reported that losses are shrinking rapidly from the bad trades engineered by the so-called London Whale, which cost the bank almost $6 billion in the first half of the year.

The losses cast a harsh light on Dimon, the chief executive viewed by some as a potential leading candidate for U.S. Treasury secretary in a second Obama administration. He has apologized repeatedly, and at length, for failing to catch the problem before it grew so big.

The nation's largest bank by assets posted net income of $5.71 billion, or $1.40 a share, up 34 percent from a profit of $4.26 billion, or $1.02 a share, a year earlier.

Analysts on average had expected a profit of $1.24 a share, according to surveys by Thomson Reuters I/B/E/S. Barclays Capital said it was the 17th time in the last 18 quarters that the bank beat Wall Street's forecasts.

Net interest margin contracted to 2.43 percent in the quarter, 4 basis points less than the prior quarter and 23 basis points lower than a year earlier.

Wells Fargo, the nation's fourth-largest bank by deposits, earned $4.9 billion in the quarter, 22 percent more than a year earlier. Per-share earnings of 88 cents just beat the average Wall Street forecast of 87 cents, although revenue missed estimates by some $270 million.

Wells, Warren Buffett's favorite bank, stumbled on the net interest margin. It fell 25 basis points to 3.66 percent in the third quarter. That was a sharper drop than expected, though bank executives insisted they were unconcerned and that investors should focus on overall profitability.

Keefe, Bruyette & Woods analyst Frederick Cannon, in a research report for clients, said the strength in mortgages was good but the weakness in the interest margin was more important.

(Reporting by David Henry in New York and Rick Rothacker in Charlotte, N.C.; additional reporting by Dan Wilchins and Jed Horowitz in New York; writing by Ben Berkowitz; editing by Matthew Lewis)

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