JPMorgan 33% Profit Jump Beats Estimates on Reserve Releases

JPMorgan Chase & Co.’s first-quarter profit rose 33 percent to a record on expense reductions and an improvement in consumer credit quality that allowed the bank to boost earnings by reducing loan-loss reserves.

First-quarter net income climbed to $6.53 billion, or $1.59 a share, from $4.92 billion, or $1.19, in the same period a year earlier, the New York-based company said today in a statement. Twenty-eight analysts surveyed by Bloomberg estimated earnings per share of $1.39 adjusted for a one-time accounting item.

JPMorgan Chief Executive Officer Jamie Dimon, 57, lifted profit by shrinking expenses 16 percent, as he grappled with a 4 percent reduction in total net revenue. Earnings also were buoyed by a drop in late payments, which helped the consumer bank reduce its loan-loss reserve by $1.2 billion. The shares fell 0.6 percent as some analysts questioned whether JPMorgan can continue posting record earnings.

“The reserve releases aren’t sustainable,” said Charles Peabody, an analyst with Portales Partners in New York. Profits on interest-bearing investments “are shrinking still, that’s not healthy. Mortgage banking is going to get weaker from here.”

Peabody estimates that the reserve releases, a tax-benefit and a one-time accounting adjustment resulted in about 26 cents per share of “non-quality” earnings in the quarter, without which JPMorgan would have missed estimates.

Litigation Costs

Among the biggest expense cuts was a $2.4 billion reduction in additional funds set aside for legal costs, which fell to about $300 million. The company also took a $300 million loss on a private-equity investment within the chief investment office, Dimon told reporters.

While mortgage volume jumped 37 percent, mortgage-banking net income dropped 31 percent to $673 million as record-low interest rates squeezed profits. Margins on lending declined to 2.37 percent from 2.61 percent a year earlier. Home prices and purchases have rebounded, yet banks aren’t making as much money on lending because interest rates remain low.

“We continue to see the compression on profit margins,” Chief Financial Officer Marianne Lake told reporters on a conference call.

Revenue in the quarter fell to $25.1 billion. Revenue at the consumer and community bank, which includes home loans and checking accounts, declined 6 percent to $11.6 billion.

Mortgage Volume

U.S. lenders extended $482 billion in mortgages in the first quarter, up 29 percent from a year earlier, as government refinancing incentives and record low borrowing costs propelled demand, according to estimates from the Mortgage Bankers Association. To stimulate economic growth, the Federal Reserve has kept its benchmark interest rate near zero since December 2008, and is buying $85 billion a month in bonds to push down long-term rates.

After JPMorgan posted three straight years of record net income, Dimon is cutting expenses, responding to sluggish global growth and low interest rates that compress profit margins on lending and yields on investments. The firm is eliminating as many as 19,000 jobs in its mortgage and community-banking divisions through 2014, it said in February.

Investment Bank

The bank posted record profit last year even after its worst trading loss ever, a wrong-way bet on credit derivatives that generated at least $6.2 billion of losses in the first nine months of 2012. About $5.68 billion of the firm’s $21.3 billion in 2012 profit came from reserve releases as fewer consumers defaulted on their payments.

Revenue at the corporate and investment-bank unit, which was expanded last year, rose 9 percent to $10.1 billion. Trading results, which were hurt in the fourth quarter as the price of bank debt rose, benefited from a $126 million gain on a so-called debt-valuation adjustment, as the price of the firm’s debt fell. That compared with a $567 million loss in the fourth quarter.

Fixed-income and equity-markets trading revenue fell 5.4 percent from a year earlier to $6.09 billion, the company said. The investment bank’s fixed-income trading book, which contains the remaining credit-derivatives position, generated $4.75 billion in revenue, compared with $5.02 billion in the year-earlier period.

Job Cuts

Consumer and community banking, which includes home loans and checking accounts, had net income of $2.59 billion, down 12 percent from a year earlier.

“The consumer and community bank is 50 percent of JPMorgan and it’s not growing,” Peabody said. “Mortgage is shrinking, cards are flat and the branch system is just growing a little bit.”

The bank, which employed about 259,000 people at the end of December, has said it will cut 13,000 to 15,000 jobs in its mortgage unit and 3,000 to 4,000 in community banking excluding home lending through the end of next year. Total headcount fell to about 255,900 by the end of March, and will shrink by about 4,000 people this year, the bank has said.

Lending at U.S. banks was little changed at $7.2 trillion from the fourth to the first quarter, according to Fed data. Demand for loans was flat even as the U.S. unemployment rate fell during all three months of the period, dropping to 7.6 percent in March.

More Sanctions

Under regulatory orders to tighten internal controls following the trading loss, JPMorgan will face more sanctions in the coming months, Dimon told shareholders in a letter released April 10.

The Fed and Office of the Comptroller of the Currency took the first regulatory actions against the bank for the credit-derivatives trade in January, ordering it to strengthen risk controls and enhance executive pay practices. The board was also directed to take into consideration control weaknesses and “adverse risk outcomes” in compensation awards for Dimon and other top managers.

Directors urged investors in March to vote against a shareholder proposal that would strip Dimon of his chairman title. They said the current structure remains the “most effective leadership model” for JPMorgan. A similar proposal last year failed with 40 percent of the vote.

Separating the titles is “a board-level decision,” Dimon told reporters today on a conference call. “I’m not going to deal with hypotheticals.”

The board cut his pay in half for 2012 after concluding that he bore some responsibility for the trading loss.

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