JPMorgan Shares Drop as Stock, Bond Trading Revenue Declines

JPMorgan Profit Falls on Weak Trading, Matches Estimates
A pedestrian walks past a JPMorgan Chase & Co. bank branch in New York. Photographer: Robert Caplin/Bloomberg

JPMorgan Chase & Co. fell the most in almost a month in New York trading after the bank reported a 23 percent drop in profit on lower investment-banking fees and revenue from trading stocks and bonds.

JPMorgan, the biggest U.S. bank by assets, dropped 2.5 percent to $35.92 at 4:15 p.m., the steepest decline since Dec. 19. The company said fourth-quarter net income slid to $3.73 billion, or 90 cents a share, from $4.83 billion, or $1.12, in the same period a year earlier.

Revenue in every investment-banking business fell from a year earlier, including an 18 percent drop in trading. The division’s total revenue declined 30 percent to $4.36 billion as corporate clients stayed on the sidelines on concern Europe’s debt crisis would lead to an economic slowdown. Chief Executive Officer Jamie Dimon said the investment-banking business is “naturally volatile” and would eventually bounce back.

“I don’t think that these numbers are permanent,” Dimon, 55, said on a conference call with journalists after earnings were released. “When things come back these numbers will boom again and we’ll be geniuses, and it won’t be because we did anything, it will be because we stayed in the game.”

JPMorgan’s drop was the third-biggest on the KBW Bank Index of 24 companies, after 2.7 percent declines at both Citigroup Inc. and Bank of America Corp.

Job Cuts

Financial institutions are eliminating jobs to compensate for falling trading revenue, disclosing plans to reduce staff by more than 200,000 worldwide, according to data compiled by Bloomberg. Royal Bank of Scotland Group Plc, Britain’s biggest government-owned bank, said this week it would cut about 4,800.

For the year, JPMorgan’s net income was a record $19 billion, 9 percent higher than in 2010. Revenue for 2011 declined 5 percent to $97.2 billion, and fourth-quarter revenue fell 18 percent, to $21.5 billion, the lowest in three years and below the $22.6 billion estimated by analysts in the Bloomberg survey.

“We believe these returns were reasonable given the environment, although the return for the fourth quarter was modestly disappointing,” Dimon said in the statement.

Fixed-income and equity-markets revenue dropped to $3.27 billion from $4 billion a year earlier and $4.75 billion in the third quarter, the company said.

Retail banking earned $533 million, down 54 percent from the third quarter and up 16 percent from a year earlier. The division benefited from a reduction in loss provisions to $779 million from $2.42 billion in the prior year.

Credit Cards

Fewer consumers fell behind on credit-card payments in the fourth quarter compared with the same period in 2010. Loans at least 30 days overdue, a signal of future write-offs, fell to 1.13 percent from 1.22 percent. Write-offs dropped to 4.29 percent from 7.85 percent the prior year and 4.7 percent in the previous quarter.

The so-called Durbin amendment, which limits what lenders can charge merchants on debit transactions, took effect on Oct. 1, affecting almost all U.S. banks and costing the top 25 about $1.5 billion, Jason Goldberg, a senior bank analyst at Barclays Capital in New York, said.

JPMorgan said today the new rules will reduce its net income by about $600 million a year, and Dimon said on the call that the Durbin amendment was a “gross miscarriage of justice.” Chief Financial Officer Douglas Braunstein said the Durbin amendment reduced revenue $350 million in the fourth quarter.

Mortgage Buybacks

Losses from buying back mortgages JPMorgan previously sold may amount to about $350 million per quarter this year, the bank forecast today. Quarterly repurchase losses averaged $337 million last year.

JPMorgan’s net income continued to benefit from releasing back into earnings reserves previously set aside for bad mortgages, credit cards and other loans, although it was smaller than in previous periods. The bank released $723 million in reserves in the fourth quarter, compared with $2.1 billion a year earlier. The bank added $4.66 billion in net income through reserve releases for the year, compared with $7 billion in 2010.

The company continued to build its litigation reserves, setting aside $528 million more for mortgage-related lawsuits.

JPMorgan, which has benefited from record low costs of funding mortgages and other assets, faces a squeeze on its net interest margin -- the difference between what it pays to borrow money and what it gets for loans and on securities.

The bank’s margin narrowed to 2.7 percent from 2.88 percent a year earlier.

Lower Taxes

JPMorgan was able to boost profit last quarter by paying less in taxes. The company’s effective tax rate was 21 percent in the fourth quarter, compared with 31 percent a year earlier and 27 percent in the third quarter.

The lower tax rate contributed about 10 cents to JPMorgan’s per-share earnings, helping it to meet or beat some analysts’ estimates, Keith Horowitz of Citigroup Investment Research, said in a note to clients today.

Goldberg at Barclays Capital said the fourth quarter was probably the worst earnings period for the industry during 2011.

“A lot of it is driven by the challenging capital markets environment,” he said in a Jan. 9 interview. “Trading revenues started out the year off strong, and then the second half of the year was quite challenged. That business bounces around.”

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. Earnings across the industry were weak in the fourth quarter and won’t have much improvement this year, he said.

Bank Stocks

Slowing economic growth, mounting mortgage liabilities and heightened concern that Europe’s debt crisis will spread have weighed on bank stocks all year. Just two of the 24 companies in the KBW Bank Index posted a gain in 2011, and the worst performer, Bank of America, was down 58 percent.

Large super-regional banks such as Wells Fargo & Co. and Pittsburgh-based PNC Financial Services Group Inc. will probably fare better as the basic business of taking deposits and making loans gives reason for optimism, Goldberg said.

Bank of America, second by assets to JPMorgan, will probably post $5.82 billion in adjusted earnings for the year when the Charlotte, North Carolina-based company reports next week, according to the Bloomberg survey.

Citigroup’s 2011 profit was estimated at $11.6 billion, or 12 percent higher than the previous year, and Goldman Sachs Group Inc. is projected to report a 62 percent decline to $2.95 billion, the Bloomberg survey shows. Morgan Stanley, the sixth-largest U.S. bank, may post $2.22 billion of adjusted earnings, down 29 percent. All three companies are based in New York.


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