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3 Reasons to Hate the JPMorgan Earnings Report

By John Maxfield - Apr 12, 2013 at 1:22PM

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While JPMorgan Chase had a great first quarter in terms of net income, there are still at least three areas that left shareholders wanting more.

By most appearances, JPMorgan Chase (JPM -0.82%) had a phenomenal first quarter. It earned $6.5 billion, a 33% increase over the same quarter last year, and a 15% uptick compared to the immediately preceding quarter. Its credit quality continued to improve. And it increased its already sizable dividend payout. There were nevertheless at least three areas that left shareholders wanting more.

1. Revenue
The first was revenue. While net income increased considerably on a year-over-year basis, the same cannot be said for the top line. For the quarter, JPMorgan recorded total net revenue of $25.1 billion. The figure was $26.1 billion in the same quarter of last year. That equates to a roughly 3.6% decrease.

The fall was largely a function of two factors. First, lower net interest income thanks to the depressed interest rate environment. And second, lower mortgage fees and "related income." With respect to the latter, it should be noted that JPMorgan's mortgage originations actually skyrocketed in the quarter, up by some 37%. The problem was rather with lower gain-on-sale margins and higher production-related expenses.

2. Net interest margin
The amount banks earn on their asset portfolios has been declining for some time now in response to the Federal Reserve's successive quantitative easing programs. Industry watchers have been wondering when this trend will stop. At least in JPMorgan's case, the answer is "not yet." The bank's net interest margin fell by three basis points on a linked-quarter basis, and by 24 basis points compared to the same quarter last year. The one saving grace for JPMorgan is it looks to net interest income for less than half of its overall revenue. This is why it was nevertheless able to notch a record quarter in terms of profits despite a flatter yield curve.

3. Share buybacks
The final thing to hate about JPMorgan's first-quarter earnings release was the expected, but still unwelcome, news about its share buyback program. And by this, I don't mean that it's decreasing the amount of common stock it's repurchasing. Quite the opposite, in fact, as the bank is authorized to repurchase $6 billion of common equity through the first quarter of 2014. The problem is that, despite spending $2.6 billion on the program during the first three months of the year, JPMorgan's outstanding share count actually increased on a year-over-year basis thanks to share grants to executives. For mom-and-pop shareholders, in other words, the biggest advantage continues to come in the form of dividends.

So there you have it. JPMorgan had a record quarter, but still had a handful of things that pessimistic analysts and investors could grasp onto. If the rest of earnings season goes like this, there is little reason for concern.

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