JPMorgan Chase & Co. (JPM – Free JPMorgan Stock Report), a global financial services provider and a component of the Dow 30, reported much higher-than-expected March-period earnings, despite a slight dip in revenues. Investors, disappointed by the mixed performance, sent the stock modestly lower in Friday-morning trading on Wall Street.
All told, the company reported earnings of $1.59 a share in the March term, up significantly from the $1.19 logged in the comparable period of 2012, and well above our estimate of $1.32. Reductions in loss reserves for mortgage and credit card loans added $0.18 to share net. Litigation expenses also fell by $2.4 billion year to year, and the tax rate declined.
On a business-line basis, higher corporate/investment banking and asset management profits offset a 12% decline in consumer & business banking results. Although management indicated that it saw signs that the economy is getting stronger, consumer and credit card loan balances declined, and business loan originations fell 20%. Deposit margin pressure, lower mortgage fees, and branch expansion costs hurt consumer & business banking results. The company offset the weak consumer banking performance with a 28% increase in corporate & investment banking profits, which benefitted from strong fixed-income revenues, valuation gains on structured notes and derivatives, and fees on lending-related commitments. Asset management profits also rose strongly, reflecting higher equity markets levels, new client inflows, and growth in performance fees. Meanwhile, the commercial banking division turned in a flat performance.
Looking ahead, we've trimmed our share-net estimates for the next three quarters, but owing to the strong start to the year, we are maintaining our full-year 2013 earnings estimate of $5.60 a share.
Our more cautious outlook includes uncertain near-term prospects for loan growth. The company also looks for further modest margin compression. JPMorgan had previously expected net interest income in 2013 to match the 2012 total, but now thinks this figure may slip 1% this year. The company also expects to record a loss on the redemption of trust preferred securities in May, which probably will pressure earnings in the June quarter.
However, management anticipates reducing credit card loan loss reserves by another $500 million over the balance of 2013, in addition to the $500 million reduction in the March quarter. It also expects companywide expenses to fall by $1 billion this year, aided by lower mortgage servicing costs and efficiency initiatives. Too, share net should get a boost from additional stock repurchases under a $6 billion stock buyback authorization.
At this time, we are introducing a 2014 earnings estimate of $5.85 a share. Loan loss reserve reductions should play a smaller role in the company's earnings outlook next year. But further economic progress might support better loan demand and renewed growth in net interest revenue.
In all, JPMorgan shares, which have retraced much of the ground lost following the big trading losses recorded roughly a year ago, still have worthwhile total return potential to 2016-2018, enhanced by the stock's above-average dividend yield. The board of directors indicated that it plans to raise the common stock dividend in the June interim, from a quarterly rate of $0.30 a share to $0.38. However, we still think the issue may be a bit too volatile for very conservative investors, since investment banking revenues can swing widely from quarter to quarter, litigation expenses are unpredictable, and the company probably faces more intense regulatory scrutiny following last year's trading mishap. Too, the outlook for losses related to its exposure to ailing European nations is unclear. JPMorgan's net exposure to the euro five nations (mostly Italy and Spain) is expected to increase by $4 billion in the June quarter, to over $16 billion.
About The Company: JPMorgan Chase & Co. is a global financial services company offering a variety of services with operations in over 60 nations. 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.