JPMorgan Chase (NYSE:JPM) kicked off earnings season for the financial sector by missing on both the top and bottom line, and revenue was down in most of JPMorgan's business segments. However, there were some reasons to be positive going forward. Here's the story behind the numbers in JPMorgan's third quarter earnings report.
At first glance, the numbers might look pretty dismal. After backing out one-time items such as tax benefits, reserve releases, and legal expenses, JPMorgan Chase earned $1.32 per share on $23.5 billion in revenue. Both numbers fell short of analysts' expectations of $1.37 and $23.69 billion, respectively.
Additionally, looking at the income of the company's individual business segments doesn't look any more promising. The Consumer & Community Banking division earned more than last year, but revenue fell sharply in Corporate & Investment Banking, Commercial Banking, and Asset Management. A glance at the following chart of each division's net income might lead you to believe that JPMorgan has taken a big step backward.
More good news than you might think
Keep in mind, however, that there was a lot of temporary drama going on during the third quarter that caused revenue to take a hit. In the earnings press release, JPMorgan Chase Chairman and CEO Jamie Dimon cited the impact of the challenging global environment and continued low interest rates. And bear in mind that the stock market was in correction territory for much of the third quarter and still hasn't fully recovered.
Despite these issues, none of which are permanent, there was some positive news as well. In fact, the bank produced a 12% return on equity, a strong improvement from last year's 10%.
One big reason for the improvement is the effort JPMorgan has put into cost controls and efficient operations. In fact, JPMorgan's noninterest expense was down 3% year over year, even with higher legal costs. For example, the company operates 142 fewer branches than a year ago and has reduced its headcount by 10,000 so far in 2015.
The cost reductions will continue to be helped by the fact that 21% more of JPMorgan's customers are actively using mobile banking than a year ago, which is good because features such as mobile deposits and statements reduce the need for labor and administrative expenses.
Also, as indicated in the chart, the Consumer & Community Banking division had a good quarter, mainly because of factors that should boost revenue fin the future as well. Consumer and business deposits were up 9% from last year and are growing nearly twice as fast as the rest of the industry average.. And the bank's customers are using their credit cards more often than a year ago, which led to a 4% increase in net interest income for the division and is also a good indicator of improving consumer confidence.
Credit quality also continues to improve. The provisions for credit losses dropped 10% from last year, and net charge-offs continued on their downward trajectory.
Finally, the core loan portfolio grew by an impressive 15% from last year companywide and is up 4% in the last quarter alone, including promising year-over-year increases in the following:
- Owned mortgages (non credit-impaired), 25%.
- Commercial loans, 13%
- Auto loans, 9%.
- Business banking loans, 6%.
The Foolish bottom line
It's important to keep in mind that any company's earnings are more than just the top and bottom line numbers, and that's especially true here. Much of JPMorgan Chase's weakness was due to non-permanent issues such as global uncertainty and record low interest rates. However, many of the numbers that can boost income in the future, such as the growing credit card business, expense reductions, and growing deposit base, were all strong. So while the third quarter may not have been the most profitable, the company did several things to set itself up for the future -- and as a long-term investor, that's what I like to see.