Reversing its trend of beating earnings estimates for the past
JPMorgan Chase & Company
) came out with a loss in the third quarter. As expected, the
banking giant surrendered its strong earnings run to deal with
the legal issues against it and reported a loss of 17 cents per
share, widely missing the Zacks Consensus Estimate of an earnings
of $1.28 and deteriorating from the year-ago earnings of $1.40.
Our proven model predicted that JPMorgan may not have beaten
earnings as it did not have the right combination of two key
ingredients - the
and Zacks Rank. While it had a Zacks Rank #3 (Hold), the Earnings
ESP was negative.
Massive legal expense has primarily dampened the banking giant's
results in the quarter. But fundamental pressure from a low
interest rate and sluggish loan growth were well evaded by the
company thanks to solid performance by its client
Results for the quarter included $7.2 billion or $1.85 per share
after-tax legal expense in Corporate (including reserves for
litigation and regulatory proceedings) and a $992 million or 26
cents per share after-tax benefit from reserve releases.
Excluding these items, JPMorgan would have earned $5.8 billion,
or $1.42 per share, surpassing of the Zacks Consensus Estimate.
Substantially higher-than-expected non-interest expenses and
reduced revenues more than offset the benefit from provision.
However, the company witnessed remarkable transactions and gained
market share during the quarter. Broad-based strength across
products helped Equity Markets revenue grow 20%. Also,
improvement in Consumer deposits and Credit Card sales volumes
Most noticeably, though the Corporate & Investment Bank
segment earned 21% lower than the prior quarter, it maintained
its #1 rank in Global Investment Banking fees. It also ranked #1
in global debt, equity and syndicated loans. All the other
segments also showed decent improvement but for Corporate/Private
Equity which reported a significant loss.
Quarter in Detail
Managed net revenue of $23.9 billion in the quarter was down 8%
from the year-ago quarter. The figure also compared unfavorably
with the Zacks Consensus Estimate of $24.2 billion.
Managed non-interest revenue decreased 12% from the year-ago
quarter to $12.9 billion. Also, net interest income fell 2% year
over year to $11.0 billion, primarily reflecting the impact of
lower loan yields due to competitive pressure and replacement of
higher yielding loans with lower yielding loans. Non-interest
expense was $23.6 billion, up 54% from the year-ago quarter.
Higher litigation reserves were primarily responsible for this
The company recorded a benefit of $543 million from managed
provision for credit losses, compared with a loss of $1.8 billion
in the year-ago quarter. Total consumer provision for credit
losses was a benefit of $273 million versus an expense of $1.9
billion in the year-ago quarter. This reflects improved
delinquency trends and lower estimated losses in the mortgage and
credit card portfolios.
JPMorgan's credit quality improved during the quarter. As of Sep
30, 2013, nonperforming assets were $10.2 billion, down 18% from
$12.5 billion a year ago. Consumer net charge-offs decreased 54%
year over year to $1.3 billion. As a result, the consumer net
charge-off rate improved to 1.47% from 3.10% a year ago.
JPMorgan maintained a strong capital position with Basel I Tier 1
common ratio of 10.5% as of Sep 30, 2013. The estimated Basel III
Tier 1 common ratio was 9.3% as of the same date.
Book value per common share was $52.01 as of Sep 30, 2013
compared with $52.48 as of Jun 30, 2013 and $50.17 as of Sep 30,
2012. Tangible book value per common share came in at $39.51 as
of Sep 30, 2013 compared with $39.97 as of Jun 30, 2013 and
$37.53 as of Sep 30, 2012.
The company resubmitted its capital plan to the Federal Reserve
during the quarter and expects to receive feedback by the year
end. The capital plan was required to address the weakness
recognized in the bank's planning process.
In Our View
The banking behemoth is working hard to offset the imminent
pressure from the settlement of criminal and civil charges over
allegations involving bad mortgages. However, in the near term,
the potentially huge settlement would certainly weaken its
footing in the industry.
Pressure on interest margin and the impacts of a stringent
regulatory environment might also mar its results to some extent
going forward. However, rapidly improving retail and investment
banking performances, and continued improvement in credit trends
are expected to support the bottom line.
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Moreover, trading revenue has been showing strength due to the
popularity of financial instruments that are not interest rate
sensitive. Persistent low interest rate environment will continue
to enhance trading activities, which should strongly support the
top line going forward.
Among the banking big shots, JPMorgan, with exposure in almost
all banking businesses, has kicked off the third quarter earnings
Wells Fargo & Company
). Therefore, the release is going to be a significant indicator
of performance by the key banking sector. However, JPMorgan's
damage due to huge legal expense is not a signal for most of the
Among other Wall Street big shots,
) is scheduled to release its third quarter results on Oct 15 and
Bank of America Corp.
) will report on Oct 16.