JPMorgan: Breaking Down a Strong Quarter

JPMorgan Chase (NYSE: JPM  ) reported earnings before the market opened on Friday. Although shares reacted negatively (down about 2% in the first half-hour of trading, more than double the Dow (INDEX: ^DJI  ) loss), as a shareholder, I was pleased with the report.

Earnings per share of $1.31 (or $5.4 billion total) actually beat last year ($1.28) and beat estimates ($1.18). Wells Fargo (NYSE: WFC  ) also reported today with a similar story (an earnings beat but a lowered stock price).

In the big picture, I think these reports are good news for banking in general and Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) in particular. Both report next week and both have been laboring under lowered expectations.

Digging into the details
As always, that final $1.31 in earnings for JPMorgan comes with a lot of puts and takes, including these significant items.

Adding to earnings:

  • $0.28 per share benefit from reduced mortgage and credit card loan reserves. This is a common occurrence as the banks are seeing better loan performance as the economy improves and (hopefully) lending practices have gotten more reasonable.
  • $0.17 per share benefit from the Washington Mutual bankruptcy settlement. This is a one-time item.  

Subtracting from earnings:

  • $0.39 per share loss from additional litigation reserves -- mostly due to mortgage-related matters ($2.5 billion in pre-tax expense). CEO Jamie Dimon believes that this should be the last significant addition to litigation reserves for a while after a "thorough review." Perhaps. Either way, this is a real expense.
  •  $0.14 per share loss due to debit value adjustments. In other words, its increased strength means it couldn't buy back its own debt as cheaply. This is a silly accounting rule that we have to deal with each quarter.

Breaking it down
Looking segment by segment, we see how JPMorgan earned its $5.4 billion this quarter.

Line of Business

Q1 2012

Q1 2011

Investment Bank $1,682 $2,370
Retail Financial Services $1,753 ($399)
Card Services & Auto $1,183 $1,534
Commercial Banking $591 $546
Treasury & Securities Services $351 $316
Asset Management $386 $466
Corporate/Private Equity ($563) $722
Total Net Income $5,383 $5,555

You'll notice that JPMorgan actually earned slightly less versus last year even though its earnings per share went up. That's the beauty of stock repurchases. Expect more as it announced $15 billion more (and $12 billion this year) after its good stress test results. This was in addition to its dividend boost (from $0.25 to $0.30 per quarter).

From the chart, you'll notice that the i-banking business is down significantly. This looks worse than it is because of that $907 million in debit value adjustments, and the business is up significantly from the fourth quarter. All in all, a solid showing from the investment bank.

The Retail Financial Services side of the business (i.e., regular banking, including mortgages) was stronger from more mortgage fees but weaker from less debit card fees (thanks to the Durbin Amendment). Last year's quarter was a loss due to $1.2 billion in provisioning (versus a slight benefit this year). Looking at charge-off rates, we see year-over-year improvement across prime mortgages, subprime mortgages, and home equity loans. Good stuff.

And on the Card Services and Auto side, we see a drop in income driven by more provisioning than last year. But its credit card charge-off rate was down to 4.37% versus 6.81% last year. More good stuff.

If you're looking at the Corporate/Private Equity line and wondering what's going on with the loss, that's where the $2.5 billion additional litigation services costs are residing.

The bottom line
You still with me? I know I got a little in the weeds on the numbers here, but I get excited about banking. Overall, I like what I'm seeing from JPMorgan.

It's been able to keep profitability strong despite challenges to non-interest income (e.g., the Durbin amendment and restrictions on checking account overage charges). It's been able to strengthen its loan portfolio. Its capital ratios are strengthening -- Tier 1 common capital ratio is 10.4% under Basel I and an estimated 8.4% under Basel III. And it's giving more capital back to shareholders.

So let JPMorgan's stock price fall on good news. It's a better buy-in price if you're interested.

For more earnings season insight like this, check out our brand-new free report: "5 Stocks Investors Need to Watch This Earnings Season." It details what to look for from Apple and four other must-watch companies as they report their latest results. Just click here to access it now.

Anand Chokkavelu owns shares of Bank of America, Citigroup, Wells Fargo, JPMorgan Chase, and Apple. He also owns long-dated options on Bank of America and warrants on Citigroup, Wells Fargo, and JPMorgan Chase. The Motley Fool owns shares of Apple and Wells Fargo. The Fool owns shares of and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Apple and Wells Fargo. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 13, 2012, at 4:43 PM, thesalesman87 wrote:

    on this article it makes since what the bank did with the buy back, but I have question on so called new car loans which most people lease not buy because they can not afford the down payment so that you can make the monthly payment.the car industry likes to count lease cars as sold which in 39 months comes back to the dealership which is put out on the lot for sale or sent to the auction,better to buy a used car and save on the price and cheaper car insurance. try it some time it will save you money

Add your comment.

DocumentId: 1861831, ~/Articles/ArticleHandler.aspx, 7/28/2014 1:20:49 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement