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Dow-30 Earnings: JPMorgan Chase & Company - Third Quarter 2012
JPMorgan Chase (JPM - Free JPMorgan Stock Report), a global provider of financial services and a Dow-30 component, has reported much better-than-expected September-quarter earnings, but still faces some significant headwinds in the year ahead. Although Wall Street initially applauded the positive performance, the stock subsequently retreated in late-morning trading.
The company earned $1.40 a share in the period, well above the $1.02 that it reported in the year-earlier term and considerably better than our estimate of $1.05. The main driver of the good bottom-line performance was revenue growth, although trends within the bank's various businesses were mixed. Low interest rates are pressuring margins and net interest revenues. And restrictions on debit card fees in force since October 1, 2011 pressured retail banking revenues. But mortgage loan originations and production revenues were very strong, spurred by the extremely low interest-rate environment and the government-sponsored Home Affordable Refinance Programs. Debt underwriting and fixed-income markets income rose. The company's smaller divisions (commercial banking, treasury & securities services, and asset management) also experienced favorable top-line growth.
Meanwhile, operating expenses fell slightly, with higher compensation costs offset by lower litigation expenses compared with the year-earlier quarter. Moreover, the loan loss provision declined year to year, but rose sharply from the unusually low June-period tally. Loan loss provisions in the credit card business more nearly matched loan losses this quarter. Recall that earnings in recent periods had benefited significantly from underprovisioning for credit card loan losses.
Too, loan losses in the September quarter reflected new regulations that required the company to write down the value of home loans (mostly home equity loans) in bankruptcy to the value of underlying collateral even if borrowers continued to make payments on those loans. Absent the change, nonaccrual loans would have declined. Management expects to recover a significant portion of the charge-offs over time as principal payments are received.
Looking ahead, the company expects the net interest margin to contract modestly over the next several quarters. However, lending to mid-sized businesses seems to be picking up, and revenue growth overall should continue to benefit from the company's ongoing investments in its businesses. Mortgage production revenues probably won't stay quite as strong as in the September period, although the company believes the housing sector is beginning to turn the corner, as do we. Too, results in the corporate and private equity division were boosted by securities gains and gains on redeemed trust preferred securities in the September interim, but may swing to a $200 million loss in the December quarter. The company took $449 million of losses related to a trading strategy that went awry in the first half of the year.
Meanwhile, provisions to reserves for credit card losses probably will remain close to the September-interim level in the final period of 2012, and operating expenses are likely to remain elevated. But the company hopes to resume buying back stock in early 2013, pending regulatory approval, which should enhance share net.
Owing to the strong September-quarter showing, we are raising our share-net estimate for 2012, from $4.60 to $5.00. Although JPMorgan, like other banks, faces some challenges in the year ahead (the LIBOR investigation, possible losses on euro zone loans, and proposed limitations on proprietary trading, as well as the tough operating climate), we are also increasing our 2013 earnings call, from $5.10 a share to $5.20.
Good-yielding JPMorgan shares have worthwhile total return potential to 2015-2017, but the volatility of some of its businesses suggests the shares aren't suitable for very conservative investors.
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.