Proving pessimists wrong,
JPMorgan Chase & Company
) reported second quarter earnings per share of $1.21, way ahead of
the Zacks Consensus Estimate of 78 cents. However, this compares
unfavorably with $1.27 earned in the prior-year quarter.
Most importantly, due to an imprudent hedging strategy, the company
incurred a derivative trading loss of $4.4 billion (before taxes)
in its chief investment office (CIO) for the period, up more than
two-fold from what was disclosed on May 10.
Despite the huge trading loss, JPMorgan's better-than-expected
earnings signal good going by the sector. A marked recovery of the
bond and equity market and the consequent strong performances by
its business segments, which helped JPMorgan overcome its
difficulties to a great extent, should lift the results of other
mega banks during the quarter.
Apart from the CIO trading loss, which impacted the results by 69
cents per share (after tax), JPMorgan's earnings per share for the
reported quarter included certain significant nonrecurring items
such as a benefit of 16 cents from gains in the CIO's investment
securities portfolio, a benefit from reduced loan loss reserves of
33 cents, a gain of 12 cents from debit valuation adjustment (DVA)
in the Investment Bank and gain of 9 cents related to loss recovery
at Bear Stearns. All these are after-tax numbers. Excluding these
items, JPMorgan's earnings came in at $1.20 per share.
Results for the reported quarter primarily benefited from lower
non-interest expenses and a substantial slowdown in provision for
credit losses, partially offset by lower revenue. Almost all the
segments except Corporate/Private Equity performed well to result
in such impressive earnings during the controversial quarter.
Investment banking results witnessed deterioration from the
prior-year quarter due to lower revenue and higher provisions.
However, the results were much better than the prior quarter on
improved market conditions. 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 improved revenue
and earnings. However, despite positive credit trends and an
expansion in credit card sales volume, the overall performance of
the Card business was not very impressive. Treasury &
Securities Services reported higher deposit balances during the
quarter and performed better than the prior and prior-year
Quarter in Detail
Managed net revenue of $22.9 billion in the quarter was down 16%
from the year-ago quarter. The figure, however, compares favorably
with the Zacks Consensus Estimate of $22.7 billion.
Managed non-interest revenue decreased 25% from the year-ago period
to $11.6 billion. The decrease ensued from $4.4 billion CIO losses
and lower investment banking fees, partially offset by higher
mortgage fees and related income. Net interest income fell 5% from
the year-ago quarter to $11.3 billion.
Non-interest expense was $15.0 billion, down 11% from the year-ago
quarter. The decrease was primarily due to lower non-compensation
Managed provision for credit losses decreased 88% from the year-ago
quarter to $214 million. Total consumer provision for credit losses
was $171 million, down from $1.8 billion in the year-ago quarter.
This reflects improved delinquency trends across mortgage and
credit card portfolios as well as reduced estimated losses.
JPMorgan's credit quality showed a decent improvement during the
quarter. As of June 30, 2012, nonperforming assets were $11.4
billion, down 5% from $12.0 billion in the prior quarter and 15%
from from $13.4 billion in the prior-year quarter. Consumer net
charge-offs decreased 23% to $2.3 billion. As a result, the
consumer net charge-off rate improved to 2.51% from 3.25% a year
JPMorgan maintained a strong capital position with Basel I Tier 1
common ratio of 10.3% as of June 30, 2012, up from 10.1% as of June
30, 2011. The estimated Basel III Tier 1 common ratio was
approximately 7.9% as of June 30, 2012.
Book value per common share was $48.40 as of June 30, 2012,
compared with $47.48 as of March 31, 2012 and $44.77 as of June 30,
The company had returned to its form with solid first quarter
results after profit declines in two straight quarters. It again
reported strong second quarter numbers despite its huge trading
loss. The positive developments of the sector and gradually
improving macroeconomic elements helped the banking behemoth report
more or less as usual.
JPMorgan has not left any stone unturned to address the fiasco
during the period. It offloaded the majority of its derivative
positions that were the culprits of its trading loss. It also
temporarily suspended its $15 billion share repurchase program and
significantly reduced its total synthetic credit risk in CIO.
In addition, the company considerably shifted the remaining
synthetic credit positions to its Investment Bank which has the
expertise, capacity, trading platforms and market franchise to
manage these positions.
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However, JPMorgan has been fighting with poor capital market
revenues, low liquidity and a tough regulatory environment, which
might mar its results to some extent. However, reduction in
reserves for future losses, gradually improving retail banking
performance, and steady credit trends in its credit card business
are expected to be on the positive side going forward.
Despite the macro pressure on credit quality, JPMorgan's credit
metrics have been steadily improving since the final quarter of
2009. We are also impressed to see a modest improvement in
delinquency trends and net charge-offs. We expect credit quality to
continue improving, thereby providing more room for bottom-line
Though there are concerns related to the future of its recent
trading loss and exposure to the European economy, equity-centric
activities in the U.S. are expected to support JPMorgan's results
in the upcoming quarters with continued recovery in the capital
Yet net interest income remains 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.
The company has diverted its attention to some extent from
enhancing shareholder value to address its CIO loss. For instance,
it has temporarily suspended its share repurchase program following
the trading debacle.
However, an income-seeking investor with the appetite to absorb
risks related to market volatility should not be disappointed with
an investment in JPMorgan over the long haul as it pays an
impressive quarterly dividend of 30 cents that yields 3.50%.
Also, from the risk perspective, as JPMorgan cleared the most
difficult stress test, it will surely be able to withstand another
JPMorgan shares currently retain a Zacks #4 Rank, which translates
into a short-term Sell rating. However, considering the company's
business model and fundamentals, we still have a long-term Neutral
recommendation on the stock.
As JPMorgan is a banking giant with exposure in almost all banking
businesses and one of the first two important bankers to kick start
second quarter results, the release should be a significant
indicator of performance in the key banking sector.
Wells Fargo & Company
) is the other bank that reported with JPMorgan.
Close on the heels of JPMorgan and Wells Fargo, the other major
) is scheduled to report on April 16,
Goldman Sachs Group Inc.
) on April 17 and
Bank of America Corporation
) on April 19.