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Dow 30 Earnings: JPMorgan Chase - Fourth Quarter 2011
Global financial services company and Dow-30 component JPMorgan Chase (JPM – Free JPMorgan Stock Report) has reported December-quarter earnings of only $0.90 a share, slightly below our estimate of $0.93 and short of the $1.12 that it logged in the year-earlier period. Wall Street was clearly disappointed, and bid the shares notably lower following the announcement.
Full-year 2011 earnings came in at $4.48 a share, in line with our estimate of $4.50 and a 13% advance over 2010 results of $3.96, largely supported by the first-half strength in investment banking income.
Management identified three significant items that affected December-quarter earnings (on a per-share basis): an accounting item that resulted in a valuation loss of $0.09; litigation reserves mostly for mortgage-related matters that reduced earnings by $0.08; and a benefit related to a reduction in primarily credit card loan loss reserves that increased profits by $0.11. All told, these three factors trimmed $0.06 from fourth-quarter share net.
The falloff in earnings was most pronounced in the company's investment banking business, where profits in the December term were only about half of the level in the year-earlier quarter and about a third of the 2011 March- and June-period tallies, when the division contributed about 40% of net income. The valuation losses were responsible for about half of the decline in investment banking profits. In addition, reduced investment banking activity caused that segment's fees to decline 39%, while lower market volumes resulted in a 26% falloff in equity markets revenue, which also had a hand in the profit decline. Volatile market conditions likewise depressed asset management performance fees and profits.
The performances of JPMorgan's other businesses were mixed. The credit card segment, another big contributor to the bottom line, turned in a 32% year-to-year profit decline in the quarter, but card profits rose 24% on a consecutive-period basis. Although card sales volume rose both year to year and sequentially, the average outstanding amount for the card portfolio fell, and reductions in the reserve for card loan losses were lower than in the prior-year period.
Meanwhile, treasury & securities services profits were hurt by higher credit costs and expenses related to exiting unprofitable operations. Retail financial services profits rose year to year, but were lower than in the September period, reflecting elevated mortgage and home equity loan losses, margin pressures, lower debit card fees, and increased investment spending. On the other hand, the commercial bank posted record revenues and higher profits, aided by healthy loan growth and lower credit costs.
We are tentatively lowering our share-net estimate for 2012 to $4.50 a share, from $4.70. Investment banking profits probably will remain volatile, although deal and merger activity should pick up as economic activity strengthens. The credit card loan loss rate may tick up slightly in the March quarter, due to seasonal factors, but we assume it will moderate thereafter. We don't expect further significant reductions in card loan reserves, however. Retail bank profits will likely be hurt by further spread compression, reflecting the very low interest-rate climate, and new debit card rules are expected to lower retail bank profits by $600 million in 2012. Mortgage repurchase losses are forecast at $350 million per quarter and mortgage loan losses, at $900 million a quarter. In addition, a further 10%-15% contraction in JPMorgan's real estate portfolio is expected to reduce net interest revenue in 2012 by $500 million.
Although the outlook for the year ahead remains uncertain, JPMorgan's diverse business mix positions it well to benefit from the stronger economic activity that we look for several years hence. Credit costs and expense growth should also moderate as mortgage loan losses and litigation costs decline, and given a probable reduction over the next few years in staff needed to handle mortgage defaults. The stock still has good 3- to 5-year total return potential, but may not be suitable for very conservative investors, given the volatility of investment banking profits and the company's approximately $15 billion of net exposure to five euro-zone nations experiencing budget problems, which adds a little uncertainty. The latter situation will take some time to resolve.
About The Company: JPMorgan Chase & Co. is a global financial services company offering a variety of services with operations in over 60 nations. At the end of 2010, JPMorgan held $2.1 trillion in assets and operations. Operational divisions include investment banking, treasury & securities services, asset management, commercial banking, retail financial services, card services, and private equity investment. The company had previously merged with Washington Mutual in September, 2008, Bank One in July, 2004, and Chase Manhattan in the final month of 2000.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.