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Dow-30 Earnings: JPMorgan Chase - Third Quarter 2013
JPMorgan Chase & Company (JPM – Free JPMorgan Stock Report), a global financial services provider and component of the Dow 30, said that outsized legal expenses caused it to report a $0.17-a-share loss for the September quarter. The stock was little changed on the news, however, as the company's efforts to resolve its legal issues have been much in the news recently. But the magnitude of the legal costs exceeded expectations.
The $0.17-a-share loss compares unfavorably with year-earlier period earnings and our estimate, both of which were $1.40 a share. Legal expenses, including additions to litigation reserves and the costs of regulatory proceedings, reduced share net by $1.85. Reductions in Consumer & Community Banking loan loss reserves offset $0.26 a share of the legal costs. Absent these two items, JPMorgan would have earned $1.42 a share, which about matched our estimate of $1.40.
Underlying profits in the Consumer, Corporate & Investment Banking and Asset Management businesses rose year to year, the Consumer business benefited from strong deposit growth and lower credit costs, which helped offset a decline in mortgage income. Corporate & Investment Banking results rose, helped by higher equity and debt underwriting fees. Asset Management profits reflected favorable market conditions and strong funds performance. But Commercial Banking profits slipped 4%, due to margin pressure and increased personnel and product expenses. The large legal costs were booked by JPMorgan's Corporate segment.
Going forward, the company's legal costs probably will remain high and uneven. JPMorgan said it had $23 billion of legal reserves at the end of September, up from just $3 billion at the start of 2010. It estimates it could incur future legal costs of up to $5.7 billion in excess of the reserve, but the environment for such expenses is highly unpredictable, given recent escalating demands from multiple government agencies related to a broad range of legal matters.
Management also expects expenses related to strengthening JPMorgan's controls and compliance activities to remain high. We wonder if efforts to shed risky businesses and clients might have some initial negative effect on results, as well. Too, lower production revenues may continue to hurt the mortgage business. So although the company is enjoying good underlying momentum in a number of its businesses and expects to release more loan loss reserves in its Consumer segment, we are lowering our estimate of reported share net for 2013 (including the September-period loss), from $5.65 to $4.30. We are also scaling back our 2014 call, from $5.90 a share to $5.50. The quarterly earnings progression in both years may be volatile, since legal costs tend to be unpredictable.
Over time, however, JPMorgan's legal costs should fall back to lower, more normal levels, and the numerous initiatives to build up businesses and gain share should pay off in better earnings. JPMorgan stock still has worthwhile total return potential to 2016-2018, but investors will need to be both patient and able to put up with some stock price volatility as the company works out its many legal issues.
About The Company:JPMorgan Chase & Co. is a global financial services company offering a variety of services with operations in over 60 nations. 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.