JPMorgan Chase (JPM - Free JPMorgan Stock Report), a global provider of financial services and a component of the Dow 30, reported relatively strong December-quarter earnings and concluded its review of its Chief Investment Office, following last fall's trading mishap, which set forth recommendations for improving the company's risk-management processes. Regaining investor confidence may take time, however. The stock had little overall reaction to the report.
The company reported earnings of $1.39 a share for the final period of 2012, considerably above results of $0.90 in the year-earlier period and our estimate of $1.20. For all of 2012, it earned $5.20 a share, a 16% increase over 2011 share net of $4.48 and above our estimate of $5.00.
Results included four significant items that largely offset each other: expenses related to the recent mortgage foreclosure settlement; negative valuation adjustments in the investment bank; positive tax adjustments; and the benefit of reduced mortgage loan loss reserves. Together, these items added $0.04 to share net.
Revenues in the quarter rose 10% year to year but weren't quite as strong as in the September period. Investment banking fees advanced 54% from the year before, and 20% on a sequential-period basis. Principal transactions revenue was also very strong in the period, but such income is very volatile and the December-quarter level may not be sustainable. Meanwhile, asset management revenues rose 10%. But lending and deposit fees slipped 3% and net interest revenue fell 8%. Assuming the current interest-rate climate persists, management expects further spread compression to reduce net income in 2013 by about $400 million. Also, the real estate loan portfolio is expected to continue contracting, reducing net interest income by about $600 million.
Expenses tracked revenue growth in the quarter, but would have risen at about half that pace absent the $900 million of mortgage-related expenses, which included the foreclosure settlement. The company incurred $100 million-$150 million of quarterly costs tied to the foreclosure review in 2012. Results in 2013 will benefit from the absence of these expenses. Management expects expenses for all of 2013 to be flattish.
One reason for the lackluster investor reception may be that smaller loan loss provisions in the consumer & community banking division, and a reduction in the loan loss reserve in the corporate & investment bank group, provided much of the impetus for the earnings advance. As conditions in the housing market improve, JPMorgan may be able to further reduce reserves for mortgage loan losses. But it may not be able to continue reducing loan loss reserves in the card business.
The company still faces a number of challenges in the year ahead, including the unfavorable interest-rate climate, possible losses related to its euro-zone exposure (which rose $2.2 billion in the quarter, to $13.9 billion), the LIBOR investigation, and upcoming proprietary trading regulations. But given JPMorgan's better-than-expected 2012 second-half performance, we have raised our share-net estimate for 2013, from $5.15 to $5.50. The good-yielding stock has worthwhile total return potential to mid-decade. But the issue may not be 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.