Fitch: Mortgage and Markets Weigh on JPMorgan 2Q'14 Results
NEW YORK -- July 15, 2014
While core operating performance remained solid, JPMorgan Chase & Co.'s (JPM)
2Q'14 net earnings continued to be weighed down by weaker performance in
mortgage and markets, according to Fitch Ratings. Net income of $6.0 billion
was down 7.9% from the prior year, but return on tangible equity remained
strong, at 14%, which is expected to compare favorably to large bank peers.
Bright spots in the quarter were a continuation of prior quarter trends, and
included record business banking loan growth, market-leading credit card
purchase volume growth, record investment banking fees in commercial banking,
positive client flows in asset management, and a continuation of solid asset
quality trends in consumer and commercial loan categories. The only
significant item of note in the quarter was a $500 million firm-wide legal
expense, which is not too surprising given the current operating environment.
Results for the Corporate and Investment Bank (CIB) were down 31% from 2Q'13,
or 28% adjusting for FVA and DVA. The decline was driven by a 15% drop in
fixed income markets, a 10% decline in equity markets, and a 6% reduction in
debt underwriting volume; all of which was anticipated, given market volumes.
Markets revenue was down 12% overall, but investment banking fees were up
modestly, as growth in advisory and equity underwriting offset weaker debt
issuance. The overhead expense ratio grew to 67%, due largely to continued
investment in controls. The CIB average VaR remained relatively low, at $43
million for the quarter, which was effectively flat with 1Q'14 and 2Q'13.
DVA/FVA was a gain of $173 million in the quarter compared to a gain of $355
million a year ago.
Net income in the Consumer and Community Banking (CCB) segment, was down from
2Q'13, given declines in mortgage revenue and higher provision expense, offset
to some extent by lower operating expenses. Mortgage origination volume was
down 66% year over year, but relatively flat with the prior quarter. JPM is
likely losing market share in the space, based on peer trends, as it holds
firm on terms and pricing, which Fitch believes is prudent. Production pre-tax
income was a negative $74 million in the quarter, which was above
expectations, given higher revenue margins, resulting from a positive mix
shift, and progress on expense cuts. Management expects production income to
be relatively similar in 3Q'14.
Pre-tax earnings in the servicing business improved due to MSR risk management
gains and declines in costs. Total servicing expenses were $552 million in the
quarter, which compares to a target of approximately $500 million per quarter
by year-end, which Fitch believes, is achievable. MSR risk management gains
were $338 million, and included $220 million of gains related to model updates
associated with slower prepayment speeds. Credit metrics in the real estate
portfolio continued to decline, which supported $300 million of reserve
releases in the purchased-credit impaired portfolio. Fitch expects additional
reserve releases over the balance of the year, although at lower levels than
seen in 2013.
Card segment fundamentals were solid, with market-leading purchase volumes,
lower net charge-off rates, and modest portfolio growth, but earnings declined
33% given lower reserve releases, spread compression, and higher expenses, due
to investment in controls, marketing, and legal expenses. Fitch expects
provision expenses and continued margin compression to be headwinds over the
remainder of 2014. Reserve releases, which were limited to $50 million in
student loans, appear largely complete. Positively, sales growth was up 12%
from the prior year and the loan portfolio has surpassed its inflection point,
with 1% average growth in the quarter.
Commercial Banking (CB) remains a very steady contributor to JPM. Loan growth
was up about 7% from 2Q'13, with continued strength in commercial real estate.
Credit quality remained very strong, with net recoveries in the quarter. Asset
Management (AM) earnings were up due to net client inflows and higher market
levels, partially offset by higher costs associated with the control agenda.
Assets under management (AUM) were above $1.7 trillion at quarter-end.
The bank's core net interest margin, which excludes the impact of CIB's
market-based activities, was down 2 basis points sequentially, to 2.64% due to
lower loan yields. JPM is expecting Treasury to report breakeven net interest
income (NII) by year-end, but reported negative NII of $10 million in 2Q'14.
JPM made more meaningful progress toward its year-end Basel III Tier 1 Common
equity (CET1) target in the quarter, due largely to retained earnings. The
CET1 ratio improved to 9.8% compared to a year-end 2014 target of 10%.
Progress was also made on the supplementary leverage ratio (SLR), which
improved 30 basis points sequentially at the firm and bank level in 2Q'14,
reaching 5.4% and 5.6%, respectively. JPM expects to target firm SLR of 5.5%
and a bank SLR of 6% longer-term. Fitch regards JPM's capital levels to be
consistent with its current ratings and would expect the bank to achieve full
compliance with all regulatory requirements, well ahead of required
JPM repurchased $1.5 billion of common equity during the quarter, which leaves
about $5 billion of authorization based on the annual CCAR process. Dividends
per share were $0.40, which equates to a payout ratio of approximately 27% on
a fully diluted basis.
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