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Fitch: JPMorgan 1Q'14 Results Hurt by Weaker Mortgage Production and Fixed Income Results
April 11, 2014 / 8:06 PM / 3 years ago

Fitch: JPMorgan 1Q'14 Results Hurt by Weaker Mortgage Production and Fixed Income Results

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(The following statement was released by the rating agency) NEW YORK, April 11 (Fitch) As expected by Fitch Ratings, JPMorgan Chase & Co.'s (JPM) 1Q'14 net earnings of $5.3 billion were hurt by weakness in fixed income and a continued decline in mortgage production. Bright spots included business banking loan growth, market-leading credit card purchase volume growth, strong investment banking fees in commercial banking, positive client flows in asset management, and a continuation of solid asset quality trends in consumer and commercial loan categories. Returns on tangible common equity were 13% for the quarter compared to 17% a year earlier. There were no significant items of note in the quarter. Results for the Corporate and Investment Bank (CIB) were down 24% from 1Q'13, or 22% adjusting for DVA. The decline was driven by a 22% decline in debt underwriting and a 21% decline in fixed income markets, which was largely expected given market volumes. Markets revenue was down overall, but investment banking fees were up modestly, as growth in advisory and equity underwriting offset weaker debt issuance. The CIB average VaR remained relatively low, at $42 million for the quarter, which was flat with 4Q'13, but down from $62 million in 1Q'13. DVA/FVA was a loss of $53 million in the quarter and is expected to remain modest going forward, given the implementation of FVA in 4Q'13. Net income in the Consumer and Community Banking (CCB) segment was down from 1Q'13 and 4Q'13, given declines in mortgage revenue and higher provision expense, offset to some extent by lower operating expenses. Mortgage origination volume was down nearly 68% year over year and 27% from the prior quarter, which appears to be in-line with other large market participants. Production pre-tax income was a negative $186 million in the quarter and is expected to be negative for the year, although it could improve modestly in 2Q'14 according to management. Pre-tax earnings in the servicing business improved given declines in the cost basis. Total servicing expenses were $582 million in the quarter, which compares to a target of approximately $500 million per quarter by year-end, which Fitch believes is achievable. MSR risk management losses were relatively large, but reflected a higher allocation of capital to the business. Credit metrics in the real estate portfolio continued to decline, which supported $200 million of reserve releases in the quarter. Fitch expects additional reserve releases over the balance of the year, although at lower levels than seen in 2013. Card segment performance was relatively solid, but Fitch expects provision expenses and continued margin compression to be headwinds over the remainder of 2014. Reserve releases, which were $250 million in the quarter ($50 million of which were related to student loans) are largely complete. Still, nothing is signaling an imminent decline in credit performance. The 1Q growth in net charge-offs were seasonally driven and early-stage delinquencies continued to decline. Potential offsets to earnings headwinds could be a continuation of strong sales growth, which was up 10% from 1Q'13, and loan portfolio growth, which appears to have bottomed. Commercial Banking (CB) remains a very steady performer within JPM, with earnings relatively flat year-over-year. Loan growth was up about 7% from 1Q'13, with noted strength in commercial real estate. Credit quality remained very strong, with net recoveries in the quarter. Asset Management (AM) earnings were down due to an increase in expenses related to higher headcount and costs associated with the control agenda. Assets under management (AUM) were above $1.6 trillion at quarter-end. The bank's core net interest margin, which excludes the impact of CIB's market-based activities, was up 2 basis points sequentially, to 2.66% due to higher investment securities yields, offset to some extent by loan spread compression. JPM is expecting Treasury to report breakeven net interest income (NII) by year-end, but reported negative NII of $87 million in 1Q'14. JPM made no progress toward its year-end Basel III Tier 1 Common equity (CET1) target in the quarter, as benefits from portfolio run-off and capital generation were offset by the impact of models not approved for Basel III. The CET1 ratio remained flat sequentially at 9.5% compared to a year-end 2014 target of 10%. Still, progress was made on the supplementary leverage ratio (SLR), which improved 50 basis points sequentially at the firm level in 1Q'14, reaching 5.1%. The improvement was driven by net retained earnings and preferred issuance of close to $4 billion in the quarter. Additionally, the impact of the U.S. final leverage ratio NPR, which was released earlier this week, benefited the ratio by about 15-20 basis points. JPM expects to target firm SLR of 5.5% longer-term. Fitch regards JPM's capital levels to be consistent with its current ratings and would expect the bank to achieve full compliance with all regulatory requirements, well ahead of required implementation. As recently disclosed, the Federal Reserve did not object to JPM's capital plan as part of the annual CCAR process. As a result, JPM announced a $0.02 per share increase in its quarterly dividend, to $0.40 per share, and authorization to repurchase up to $6.5 billion of common equity through 1Q'15. Contact: Meghan Neenan, CFA Senior Director +1 212-908-9121 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Joo-Yung Lee Managing Director +1 212-908-0560 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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