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Dow-30 Earnings: JPMorgan Chase – First Quarter 2012
JPMorgan Chase (JPM -Free JPMorgan Stock Report), a global financial services company and a Dow-30 component, surprised investors with better-than-expected March-quarter earnings per share, although net income slipped 3% from the relatively strong year-earlier tally. Investors greeted the report with a mixed response. The stock, which rose nearly 1.9% on Thursday, prior to the news, inched a bit higher in early morning trading on Friday, but later fell into the red in a generally weak equity market.
JPMorgan earned $1.31 a share in the March quarter, up 2% from $1.28 in the year-earlier period and well ahead of the $0.90 logged in the 2011 December quarter. Expenses, up 15% year to year, outpaced revenue growth of 6%, but the loan loss provision declined 38%, and a lower share count offset the slight reduction in net income.
A number of significant items reduced earnings by a net $0.08 a share, including additions to litigation reserves, mostly for mortgage-related matters (a negative $0.39) and $0.14 of valuation losses in the investment banking business, offset by a $0.17 gain related to the Washington Mutual bankruptcy settlement and the positive impact of reductions in credit card and real estate loan loss reserves (benefits of $0.12 and $0.16, respectively).
The company's three largest business segments (investment banking, retail financial services, and card services/auto) turned in relatively good performances in the quarter, although profits moderated in investment banking (due to the valuation losses, lower investment banking fees, and a smaller reduction in the loan loss reserve than in the year-earlier quarter). Card services income also fell short of the strong year-earlier tally. The $2.2 billion improvement in retail banking profits was driven by higher mortgage income (originations rose 6%) and a nearly $1.3 billion positive year-to-year swing in the loan loss provision, to a benefit of $96 million.
Looking ahead, there may be a little pressure on spreads in the retail banking business in the current very low interest-rate climate, and new rules restricting debit card fees are expected to reduce noninterest revenue by $600 million in 2012. More noncore mortgage loans probably will continue to run off the balance sheet, as well. Losses on mortgage and real estate loans should fall further, although reductions in loan loss provisions may not be as sharp as in the quarter just ended. But mortgage default and servicing costs ought to continue declining. Results in the investment banking business may remain uneven, although the company retains strong shares in debit and equity underwriting. Credit card loan losses should continue to edge lower. And management doesn't expect to make such large additions to its litigation reserves going forward.
In addition, the company has authorized a new $1.5 billion common equity repurchase program, with up to $1.2 billion approved for 2012, which ought to enhance share net. In all, we have raised our share-net estimate for 2012, from $4.55 a share to $5.00, and are introducing a 2013 estimate of $5.50.
Over the pull to 2015-2017, JPMorgan should benefit from an eventual increase in short-term interest rates, share gains in western states where it has been building branches, and significant reductions in mortgage and other litigation costs. The company also seems to be making progress toward meeting new stricter equity capital guidelines. Long-term investors may want to consider this issue. Note also that the dividend on the common stock was recently raised to $0.30 a share, starting with the April disbursement.
About The Company:JPMorgan Chase & Co. is a global financial services company offering a variety of services with operations in over 60 nations. At the end of 2011, JPMorgan held $2.3 trillion in assets and operations. Operational divisions include investment banking, treasury & securities services, asset management, commercial banking, retail financial services, card services, and private equity investment. The company had previously merged with Washington Mutual in September, 2008, Bank One in July, 2004, and Chase Manhattan in the final month of 2000.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.