JPMorgan Earnings Beat Estimates on Mortgage Lending Gains

JPMorgan Chase & Co. (JPM) reported a 3.1 percent drop in earnings, a smaller decline than analysts estimated as mortgage revenue surged and trading almost doubled from the fourth quarter.

First-quarter net income fell to $5.38 billion, or $1.31 a share, from a record $5.56 billion, or $1.28, in the same period a year earlier when there were more shares outstanding, the New York-based company said today in a statement. Per-share profit compared with an average estimate of $1.17 from 28 analysts surveyed by Bloomberg.

JPMorgan, led by Chief Executive Officer Jamie Dimon, 56, benefited from gains in mortgage lending as low interest rates and federal incentive programs encouraged homeowners to refinance. Mortgage fees and related revenue totaled $2 billion, compared with negative revenue of $489 million a year earlier. U.S. lenders made $318 billion in residential mortgages during the first quarter, including $242 billion in refinanced loans, according to the Mortgage Bankers Association.

“This is going to be a strong quarter for anyone who has a big mortgage lending or trading business,” said Paul Miller, an analyst at FBR Capital Markets, before results were released. He said expanded federal programs to aid in refinancings have given the market a boost. “It might be the best quarter in a long time.”

Photographer: Scott Eells/Bloomberg

James "Jamie" Dimon, chief executive officer of JPMorgan Chase & Co., in New York. Close

James "Jamie" Dimon, chief executive officer of JPMorgan Chase & Co., in New York.

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Photographer: Scott Eells/Bloomberg

James "Jamie" Dimon, chief executive officer of JPMorgan Chase & Co., in New York.

Fourth Quarter

Profit improved over the fourth quarter, when JPMorgan, the largest U.S. bank, earned $3.73 billion, or 90 cents a share.

“Credit continues to improve on the consumer side in both mortgage and credit card,” Chief Financial Officer Doug Braunstein said on a conference call with journalists. Credit card and mortgage delinquencies fell 36 percent and 25 percent over last year, respectively, he said.

Still, Dimon warned in the statement that fallout from the housing collapse isn’t over.

“We expect to see elevated levels of costs and losses associated with mortgage-related issues for a while longer,” he said.

JPMorgan, which acquired Washington Mutual and Bear Stearns Cos. in 2008, set aside $2.5 billion more toward its litigation costs during the first quarter mostly for mortgage-related lawsuits. Dimon previously told shareholders that the company would be making as much as $24 billion in annual profit if it weren’t for all of its mortgage losses.

Share Performance

JPMorgan fell $1.63, or 3.6 percent, to $43.21 in New York trading at 4:15 p.m. The shares gained 35 percent this year through yesterday, compared with a 24 percent increase for the KBW Bank Index. (BKX)

Revenue rose 6 percent to $26.7 billion from $25.2 billion during the first quarter of last year. Revenue at the investment-banking unit didn’t match last year’s near-record $8.23 billion, falling 11 percent to $7.32 billion. It gained 68 percent from the fourth quarter as financial markets in Europe stabilized.

U.S. banks are in the middle of the industry’s worst two years of revenue growth since the Great Depression, according to Mike Mayo, an analyst with independent research firm CLSA in New York.

Net income in investment banking declined 29 percent, to $1.68 billion in the first quarter from $2.37 billion the year before and $726 million in the fourth quarter.

Fixed Income

Fixed-income and equity-markets revenue dropped to $6 billion from $6.64 billion a year earlier and $3.27 billion in the fourth quarter, the company said.

“You saw very strong flows in the underlying customer businesses in both fixed-income and equity markets,” Braunstein said on the call. JPMorgan oversees $150 billion in its wealth- management unit and has $17.9 trillion of assets under custody in treasury and securities services, he said. Both were record highs, according to Braunstein.

Trading results, which got a lift in the third quarter as the price of bank debt fell, didn’t get the same accounting benefit in the fourth quarter or first three months of this year. The bank booked a $907 million loss from its so-called debt-valuation adjustment in the first quarter as the price of its debt rose, compared with a $1.9 billion gain in the third quarter.

Loss Reserves

JPMorgan had one-time items including DVA that, in total, reduced earnings by about $500 million or 9 cents a share, Braunstein said. The bank benefited from a $1.8 billion reduction in mortgage and credit-card loan loss reserves and a $1.1 billion gain from a Washington Mutual bankruptcy settlement.

Retail banking, which includes home loans and checking accounts, earned $1.75 billion, up from $533 million in the fourth quarter and a loss of $399 million a year earlier. The net interest margin, which measures the profit margin on lending, declined to 2.61 percent from 2.89 percent a year earlier.

Demand for loans rose as the unemployment rate fell to 8.2 percent at the end of March from 8.9 percent a year ago.

Fewer consumers fell behind on their credit-card payments in the first quarter compared with the same period in 2011. Loans at least 30 days overdue, a signal of future write-offs, fell to 2.56 percent from 3.57 percent a year earlier. Write- offs dropped to 4.4 percent from 6.97 percent the prior year and increased from 4.29 percent in the previous quarter.

Wells Fargo

JPMorgan and Wells Fargo & Co. (WFC) are the first of the top six U.S. banks to release results, and are projected by analysts to post the highest earnings of the group. Wells Fargo, the fourth- largest U.S. bank, reported a 13 percent increase in first- quarter profit, reaching a record high of $4.25 billion and beating analysts’ estimates.

“This rally can and will continue,” Miller said in an April 10 research note. Miller favors JPMorgan, Wells Fargo and other large mortgage banks over their smaller peers. Although bank stocks have outperformed the broader Standard & Poor’s 500 Index in the past three months, the industry still has “room to run,” Miller said.

Bank valuations remain low, with lenders in the KBW Index trading at an average price-to-earnings ratio of about 11.5 yesterday, compared with an average of 14 for the S&P 500 Index.

Trading and investment banking also picked up from “dreadful” levels in the fourth quarter, Miller said.

Citigroup Inc. (C), the third-biggest behind JPMorgan and Bank of America Corp. (BAC), may say it earned $3.12 billion on an adjusted basis when it releases results on April 16, the survey of analysts shows.

Goldman Sachs Group Inc. (GS) may say it earned $1.85 billion when it announces its results on April 17. Charlotte, North Carolina-based Bank of America may report a profit of $1.73 billion on April 19 and Morgan Stanley may say it earned $259 million when it reports results that day.

To contact the reporter on this story: Dawn Kopecki in New York at dkopecki@bloomberg.com.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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