JPMorgan Misses, Warning for Banks - Analyst Blog

By Kalyan Nandy,

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JPMorgan Chase & Company 's ( JPM ) fourth quarter earnings per share of 90 cents marginally missed the Zacks Consensus Estimate of 92 cents. Results were worse than $1.12 earned in the prior-year quarter.

Earnings per share for the reported quarter included certain significant nonrecurring items, such as a 9 cent loss from debit valuation adjustment ( DVA ) gains in the Investment Bank, expense for additional litigation reserves of 8 cents and a benefit from reduced loan loss reservesof 11 cents. Excluding these items, JPMorgan's earnings came in at 96 cents per share.

Results for the reported quarter were primarily hurt by a substantial decrease in revenue, which more than offset a slowdown in provision for credit losses and lower non-interest expense.

After a long time, JPMorgan missed expectations as it buckled under the weakness in the wider economy and the fundamental pressures on the banking sector.

Investment banking results, excluding the DVA gain, witnessed a drastic deterioration from the prior-year quarter due to lower revenue and higher provision for credit losses. However, with a healthy market share, the segment maintained its #1 rank in Global Investment Banking Fees.

Retail Financial Services and Commercial Banking divisions demonstrated good underlying performances, with solid revenue and earnings. However, despite an expansion in credit card sales volume, the overall performance of the Card business was not up to the mark. Treasury & Securities Services reported record deposit balances during the quarter.

For the full year, earnings came in at $4.48 per share, also falling shy of the Zacks Consensus Estimate of $4.51. This, however, compared favorably with earnings of $3.96 in the previous year.   

Quarter in Detail

Managed net revenue of $22.2 billion in the quarter was down 17% from the year-ago quarter. The figure also compares unfavorably with the Zacks Consensus Estimate of $23.0 billion. For the full year, revenue was $99.8 billion, down 5% from $104.8 billion in 2010. However, this compares favorably with the Zacks Consensus Estimate of $99.2 billion.

Managed non-interest revenues decreased 32% from the year-ago period to $9.9 billion. The decrease was a result of lower securities gains, lower principal transactions revenue, lower mortgage fees and related income and lower investment banking fees, partially offset by higher lending and deposit-related fees. However, net interest income was flat with the year-ago quarter at $12.3 billion.

Non-interest expenses were $14.5 billion, down 9% from the year-ago quarter. The decline was primarily due to lower non-compensation expense.

Managed provision for credit losses decreased 28% from the year-ago quarter to $2.2 billion. Total consumer provision for credit losses was $1.8 billion, down 42% from $3.1 billion in the year-ago quarter. This reflects improved delinquency trends across most consumer portfolios compared with the prior-year quarter.

Credit Quality

JPMorgan's credit quality showed a decent improvement during the quarter. As of December 31, 2011, non-performing assets were $11.0 billion, down from $12.2 billion in the prior quarter and $16.6 billion in the prior-year quarter. Consumer net charge-offs decreased to $2.6 billion from $4.8 billion in the prior-year quarter. As a result, the consumer net charge-off rate improved to 2.74% from 4.89% in the year-ago quarter.

Capital Position

JPMorgan maintained a strong capital position with Basel I Tier 1 common ratio of 10.0% as of December 31, 2011, up from 9.9% as of September 30, 2011 and 9.8% as of December 31, 2010.

Book value per common share was $46.59 as of December 31, 2011, compared with $45.93 as of September 30, 2011 and $43.04 as of December 31, 2010.

Our Viewpoint

For the last couple of quarters, JPMorgan has not been delivering exceptionally as it is wont to given the economic weakness at large and the fundamental pressures on the banking sector. The sector was fraught with poor revenue figures, weak loan demand and low liquidity throughout the second half of 2011.

Among the fundamental challenges, JPMorgan has been fighting with poor capital market revenues, weak loan demand, low liquidity and a tough regulatory environment. But we do not have an inkling of doubt on the trustworthiness of the stock, given the company's past consistency in earnings performance and high dividend-yielding nature.  

Most importantly, despite the macro pressure on credit quality, JPMorgan's credit metrics have been steadily improving since the final quarter of 2009. Though provision continued to reflect heightened losses in the mortgage and home equity portfolios, we are impressed to see a modest improvement in delinquency trends and net charge-offs. We expect the trend of improving credit quality to continue, providing more room for bottom-line improvement.

Though there are increasing concerns related to the European economy, equity-centric activities in the U.S. are expected to support JPMorgan's results in the upcoming quarters with continuous recovery in the capital markets.

Moreover, net interest margin ( NIM ) continues to remain under pressure, affecting the traditional banking businesses. Also, with the thrust of new banking regulations, there will be pressure on fees and loan growth could remain feeble.

In Conclusion

An investor with the appetite to absorb risks related to market volatility should not be disappointed with an investment in JPMorgan over the long haul. Though the stock is not at all undervalued, JPMorgan's fundamentals remain highly promising with a diverse business model and a strong balance sheet. 

JPMorgan shares maintain a Zacks #3 Rank, which translates into a short-term Hold rating. However, considering the company's business model and fundamentals, we have a long-term Neutral recommendation on the stock.

Following the announcement of fourth quarter results, the stock was down about 4.3% in before-market trade.

Given that JPMorgan is a banking behemoth with significant exposure in almost all banking businesses and the first among the other important bankers to flag off fourth quarter results, the release is going to be a significant indicator of performance in the key banking sector.

Close on the heels of JPMorgan, the other major banks, namely Citigroup Inc. ( C ) and Wells Fargo & Company ( WFC ), are scheduled to report on January 17, while Goldman Sachs Group Inc. ( GS ) will report on January 18 and Bank of America Corporation ( BAC ) on January 19.

BANK OF AMER CP ( BAC ): Free Stock Analysis Report
CITIGROUP INC ( C ): Free Stock Analysis Report
GOLDMAN SACHS ( GS ): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: BAC , C , DVA , GS , NIM

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