JPM Catapulted Into Spotlight
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On Jan. 16, 2013 JPMorgan Chase (NYSE: JPM) reported its performance for the fourth quarter of 2012. JPMorgan Chase reported an EPS of $1.39 on revenues of $24.4 billion. While the revenues slipped slightly below their estimate of $24.42 billion, the bottom line was way ahead of its expectations. The earnings per share figure for Goldman Sachs exceeded its consensus mean estimate by around 20%. This article will aim to dig into reasons for such a performance.
The table below summarizes the earnings and revenue surprise.
JPMorgan experienced a solid quarter, thanks to a lower tax rate and better performance by the bank’s corporate and investment banking divisions. Core corporate and investment banking revenues of $8.2 billion were $182 million better than the forecast of Credit Suisse. Investment banking fees of $1.7 billion, which improved 20% sequentially and 54% year over year, were the prime reason for such an improvement in the segment’s results. Revenues from equity and debt underwriting were up 13% and 23%, respectively, compared to the same quarter last year.
Excluding the negative DVA adjustment, revenues from core fixed income and equities trading were $4.1 billion. This is 15% below the revenues from the last quarter; however, it's up 19% compared to the same quarter of the previous year. Revenues of $3.2 billion from core fixed income were 15% down sequentially and up 21% year over year, reflecting solid client revenue and improved performance in credit-related products.
Revenues of $12.4 billion from Consumer and Community Banking were negatively impacted by lower mortgage banking, lending and asset management fees. The revenues of C&CB declined 3% sequentially, but were up 10% from a year ago. Driven by 15% sequentially lower mortgage fees, mortgage banking revenues dropped 10% to $3.3 billion. Average loans, including PCI, in the real estate portfolios declined 3%. However, Card, Auto and Merchant Services of $4.8 billion increased 2% compared to the previous quarter, driven largely by improvement in both fees.
The bank experienced 3% quarter over quarter growth in commercial loans, but consumer loan growth declined 1%, which led the average loans to remain relatively flat. The net interest margin declined 3 basis points to 2.4% driven by lower loan and securities yields, lower reinvestment opportunities and higher balances in the Fed funds sold. Going forward, interest income will likely be driven by the bank’s ability to grow loans. The management expects continued pressure on net interest margin due to the ultra low interest rate environment.
Asset credit quality trends improved over the fourth quarter as non-performing assets of $11.7 billion declined 6% compared to the previous quarter. The charge-offs of $1.6 billion declined a significant 41% over the same time period.
The bank’s capital position improved during the fourth quarter of 2012. The bank’s estimated tier 1 common ratio under Basel III guidelines improved from 8.4% in the linked quarter to 8.7%. Credit Suisse estimates the bank would reach the 9.5% Basel III tier 1 common ratio by the second half of the current year.
Besides, the bank also made an internal report public that outlined the mistakes and the supervision by executives who played a role in the trading loss episode. The bank also disclosed that as a result of the trading loss Chief Executive’s compensation for 2012 would be cut by half to $11.5 million. Separately, the bank is also part of the 10 banks that are participating to pay $8.5 billion to close a regulatory probe related to foreclosures. The bank had previously said it would take a $700 million pretax charge in the fourth quarter related to the cost of the settlement.
I believe Morgan Stanley (NYSE: MS) and Bank of America (NYSE: BAC), which are reporting on Jan. 18 and Jan. 17, respectively, will benefit from this improved activity in equity and fixed income underwriting and trading. Further, both these banks will experience a decline in their net interest margins and are part of the 10 banks that have agreed to pay to settle the case of wrongfully foreclosed loans on homeowners. Therefore, both the bank will take a charge in their fourth quarter earnings.
I would expect the company to be able to generate earnings growth in 2013, despite a weak revenue environment as lower expenses and capital deployment should allow for improved EPS and strong ROTE. In 2013, there should be more meaningful expense reductions as the inventory of distressed housing is reduced and litigation costs are likely lower. Therefore, I recommend investors buy the stock.
equityfinancials has no position in any stocks mentioned. The Motley Fool owns shares of Bank of America and JPMorgan Chase & Co.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!