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By David Henry and Tanya Agrawal
April 11 JPMorgan Chase & Co posted far
weaker-than-expected quarterly profit as uncertainty about the
U.S economy weighed on investor trading volumes and consumer
Results from the first of the major Wall Street banks to
post earnings underscore how difficult the first quarter was for
the financial sector. JPMorgan's bond trading revenue plunged 21
percent, and mortgage lending revenue fell 84 percent from the
same quarter last year.
Most of the bank's big businesses, including commercial
lending and credit cards, delivered lower profits. But the bank
is not responding by dialing up its risk-taking in commercial
lending, and it views falling revenue in its bond trading
business as part of a business cycle instead of a symptom of a
broad-based and lasting decline in fixed-income trading.
"It's not like selling cereal - it's not like your volumes
go up 2 percent every day," Chief Executive Jamie Dimon said to
reporters on a conference call. The business will grow over the
next decade or two, he added.
Dimon, who earned plaudits for keeping his bank consistently
profitable during the financial crisis, is struggling to figure
out how to navigate the current environment.
In his annual letter to shareholders earlier this week,
Dimon noted that JPMorgan will have spent more than $2 billion
more than usual from 2012 through the end of this year on
complying with new rules, and devoted more than 1 million work
hours to meeting new mortgage rules. The bank's net income
dropped 16 percent last year due to massive legal settlements
and rising compliance costs.
Friday's results showed how the bank's troubles appear to be
extending beyond outsized legal settlements and meeting new
rules, and into areas more fundamental to the business, such as
loan demand and trading volume.
Overall, net income fell 19 percent to $5.27 billion, or
$1.28 per share, from $6.53 billion, or $1.59 per share, in the
same quarter of 2013, the biggest U.S. bank said on Friday.
Analysts on average had expected earnings of $1.40 per
share, according to Thomson Reuters I/B/E/S.
Total net revenue fell 8.5 percent to $22.99 billion,
falling well short of the average estimate of $24.53 billion.
JPMorgan shares, which recently topped $61 to trade at their
highest level in 13 years, fell 3.1 percent to $55.63 in
MORTGAGE LENDING FALLS
One area where the bank is meeting with some success is
keeping costs under control, a crucial effort when future
revenues may be weak. JPMorgan said non-interest expenses fell 5
percent in the latest quarter to $14.6 billion.
Dimon is aiming to hold down overhead - which he defines as
non-interest expenses aside from litigation - to below an
average of $14.75 billion per quarter, or $59 billion for the
Mortgage banking net income fell to $114 million in the
quarter, a drop of $559 million from the year-earlier period.
Production revenue, a measure of lending revenue, fell 84
percent to $161 million, and the bank made $17 billion of home
loans, a 68 percent decline from a year earlier.
U.S. mortgage lending has cooled after rising rates in the
second half of last year have given fewer homeowners reason to
refinance their loans.
Wells Fargo & Co, the biggest U.S. home lender, also
reported results Friday and said its income from mortgage
banking fell 46 percent from a year earlier.
Gains on one-time items, however, contributed to a higher-than
expected 14 percent rise in quarterly profit for the company.
For JPMorgan, rising bond yields in the middle of last
year, which resulted from the Federal Reserve's decision to slow
down its bond buying program, also weighed on fixed income,
currency, and commodity trading revenue, which fell to $3.76
billion from $4.75 billion in the same quarter last year.
Commercial banking income fell 3 percent to $578 million,
hurt by declining revenue from making loans. Consumer credit and
debit card income fell 1 percent to $1.35 billion.
JPMorgan, the largest U.S. bank by assets, said total assets
at the end of March stood at $2.48 trillion, up from $2.42
trillion at the end of December.
The firm's supplementary leverage ratio, a measure of a
bank's capital compared with its assets, stood at 5.1 percent at
the end of the quarter.
Leverage ratios took on added importance on Tuesday when the
Federal Reserve approved new rules setting minimum levels that
could force the eight biggest U.S. banks to boost their capital
by a total of $68 billion.
The rule sets a higher minimum of 6 percent for the
company's insured bank subsidiary.
Before the rule was approved in its latest form, JPMorgan
had said it was on track to raise its ratio from 4.6 percent at
the end of December to the 5 percent minimum for its holding
company by the end of this year.
LITIGATION EXPENSES "IMMATERIAL"
JPMorgan said its litigation expenses were immaterial in the
latest quarter, under its "other corporate" accounting line.
Litigation expenses totaled $347 million in the year-earlier
quarter and $847 million in the fourth-quarter.
In the first quarter two years ago, litigation costs totaled
$2.5 billion as the bank built up reserves in anticipation of
big legal settlements that it ultimately reached in 2013.
JPMorgan paid more than $20 billion last year to resolve legal
claims stemming from a wide range of problems, including its
London Whale derivatives loss and its marketing of bad mortgage
securities before the financial crisis.
JPMorgan's shares - which have nearly doubled in price since
the bank was rocked in 2012 by its London Whale derivatives
trading scandal and $6.2 billion loss - were trading at a
multiple of 9.56 times estimated forward earnings on Thursday.
That compares with 9.93 times for Goldman Sachs Group Inc
and 11.38 times for Morgan Stanley, both of which
report next week.
(Reporting by David Henry in New York and Tanya Agrawal in
Bangalore; Editing by Ted Kerr, Dan Wilchins, Sofina Mirza-Reid
and Richard Chang)