3rd UPDATE: JP Morgan's Revenue Up, Profit Hurt By Legal Expenses
April 13 2012 - 12:30PM
Dow Jones News
J.P. Morgan Chase & Co. (JPM) reported strong first-quarter
revenue as demand for new loans continued to increase and capital
market activity improved.
Yet, the financial crisis continues to haunt J.P. Morgan: Its
$5.4 billion profit reported early Friday was down 3.1% from a year
earlier due to legal expenses, and charges related to the value of
its own debt masked the increase in revenue.
Chief Financial Officer Douglas Braunstein, during a conference
call with reporters, said the quarter showed a "solid performance
across most of our businesses," including "real strength" in
capital markets. The bank also had "significant improvement in
mortgage banking" driven by government homeowner aid programs and
more customers refinance mortgages while interest rates are
falling, the CFO said.
J.P.Morgan's quarterly profit got a $1.8 billion boost because
the bank reduced its overall reserve, the money set aside for
potential future losses from delinquent loans. That, "ultimately...
carried the day," said JMP Securities analyst David Trone.
Revenue rose 6% from a year earlier and 24% from the previous
quarter, to $26.7 billion. But expenses rose faster than revenue,
mainly because compensation in capital markets businesses
increased. The bank still expects costs to remain flat this
year.
Loans to businesses large and small continued to increase,
partly a reflection of an improving economy. Corporations have
cash, and "housing is getting very close to the bottom," Chief
Executive Jamie Dimon said during the call. Consumer debt is "back
where it was 20 years ago."
"I wouldn't overreact" to recent disappointing employment growth
that has recently rattled markets. The economy "looks OK...we all
wish it were a little stronger," Dimon said. "Whether we have a
strengthening recovery, we don't know yet."
CFO Braunstein also addressed the issue of derivative trading in
London by Bruno Iksil, which has recently caused controversy. He
said the bank reduced its structured credit book "over time" and
"we are very comfortable with the positions we have."
Braunstein said the bank collects more deposits than it makes
loans and invests the difference, which in the first quarter was
$360 billion. Those investments need to be hedged to protect J.P.
Morgan's balance sheet, a practice that is "consistent both, I
think, with the spirit and the written rules" of the Volcker rule
of the Dodd-Frank financial overhaul act.
Dimon added during a conference call with analysts later, the
issue is "a complete tempest in a teapot."
The banking giant's results kicked off the reporting season for
U.S. banks, delivering investors the first look at a quarter
expected to show improvements at the nation's largest financial
institutions after a bleak end to 2011.
Nomura analyst Glenn Schorr called the quarter the "same strong
JPM story" as in previous quarters. Shares, however, fell 1.6% in
morning trading, to $44.12 in a down market.
J.P. Morgan's investment banking arm bounced back in the first
few months of the year, turning in a profit of $1.68 billion, down
29% from a year earlier but more than double what it booked in the
fourth quarter.
The bank's retail services business, which handles consumer and
small-business clients, reported a profit of $1.75 billion,
compared with a $399 million loss a year earlier and $533 million
profit in the fourth quarter.
The $2.5 billion reserve for litigation expenses, mainly tied to
mortgage banking, was considerably higher than the $528 million
J.P.Morgan took in the fourth-quarter. CFO Braunstein said the bank
is unlikely to add significantly to that reserve in future
quarters, and Dimon told analysts that the addition in the
first-quarter came after a "thorough review" of all possible
litigation matters, including mortgage-backed securities investors'
demands that the bank take back faulty mortgages.
J.P. Morgan reported earnings of $1.31 a share, up from $1.28 a
year earlier as the share count outstanding declined. The latest
quarter included a net 8 cents a share loss tied to litigation
expenses and changes in the value of the bank's debt. Analysts
polled by Thomson Reuters expected a per-share profit of $1.18,
excluding debt-related charges.
Analysts had expected $24.68 billion in managed revenue; J.P.
Morgan reported $27.4 billion excluding the impact of tax-exempt
securities and other non-GAAP items.
The bank took a $900 million loss related the value of its own
debt--when banks do well, their bond prices rise and that would
make it more expensive for them to retire debt--something banks are
required to account for.
Overall, the bank's credit-loss provisions--funds set aside each
quarter to offset loan losses--totaled $726 million, down from
$1.17 billion a year earlier and below the $2.18 billion set aside
in the fourth quarter. The provision in middle-market commercial
and in consumer lending rose, but that is a reflection of loan
demand in those divisions, Braunstein said. More loans require
higher reserves for potential defaults.
-By Matthias Rieker and Mia Lamar, Dow Jones Newswires;
212-416-2471; matthias.rieker@dowjones.com
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