The first quarter was a tough one for JPMorgan. Profit fell 19
percent, revenue fell 8 percent, and the bank set aside 38 percent
more money to cover loan losses.
But the important thing is that the bank is not lowering its lending
standards, Chief Executive Jamie Dimon told reporters.
"We feel really good about the risks we're taking ... for the future
of the company," Dimon said on a conference call.
The bank will not be too aggressive in areas where it says it
believes other lenders have taken leave of their senses, such as
business lending, Chief Financial Officer Marianne Lake told
analysts on a separate call.
"We'll do every rational and sensible deal we can do but we aren't
going to chase growth at the expense of discipline," Lake said.
Some investors say they appreciate the bank's strategy. Analyst Mike
Scanlon at John Hancock Asset Management said Dimon seems to be
making the kind of cautious lending decisions that long-term
investors should want.
"They gave up revenue instead of chasing every dollar of business,"
Before the financial crisis, Charles "Chuck" Prince, then chief
executive of Citigroup, infamously said that his bank had no choice
but to make aggressive loans to private equity funds because its
rivals were. "As long as the music is playing, you've got to get up
and dance," he told the Financial Times.
A senior executive at JPMorgan, who was not authorized to speak on
the record, said on Friday, "Jamie is not going to dance."
By backing away when others lend more aggressively, JPMorgan is
acting like it did before the credit crisis, Scanlon added. John
Hancock Asset Management owns about 1 million shares of JPMorgan.
Dimon's recent tangles with regulators over a range of issues,
including the loss of more than $6 billion in the London Whale
derivatives scandal, may be making the bank more inclined to play it
safe when it comes to all kinds of risk, said analyst Gerard Cassidy
of RBC Capital Markets.
"All of this is coming together to make a conservative bank that in
the long-run is going to work very well for shareholders, but over
the near-term is going to come up short at times, like they did this
quarter," said Cassidy.
JPMorgan has one of the highest valuations among the major
commercial and investment banks, as measured by share price to
tangible common book value, which is due in part to its tendency to
know when to scale down credit risk, Cassidy added.
Wells Fargo & Co, the fourth-largest U.S. bank by assets, agrees
that competition is heating up now.
"You tend to see competitors be a little more aggressive, price
things more aggressively to generate revenue," said Tim Sloan, chief
financial officer at Wells Fargo.
Wells Fargo said on Friday that it managed to boost its lending book
in the first quarter, but much of its 14 percent net profit increase
in the period came from one-time gains.
For JPMorgan, remaining disciplined is painful.
The bank's mortgage lending and bond trading businesses logged steep
profit declines, and the bank's profits also fell in many other key
businesses, including corporate lending and debt underwriting.
"It was not an exciting set of numbers," said Andrew Kohl, an
associate portfolio manager at Alpine Financial Services Fund, which
owns JPMorgan shares.
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The results and company commentary prompted analyst Chris Kotowski
of Oppenheimer to cut his JPMorgan earnings estimates. He reduced
his 2014 estimate to $5.64 a share from $6.13, and his 2015 estimate
to $6.00 a share from $6.45.
Total loans on JPMorgan's books grew less than 1 percent in the
first quarter compared with the year-earlier period, and the average
rates it earned on its $730 billion of loans fell to 4.49 percent,
from 4.78 percent.
One headwind for loan growth at JPMorgan is the impact of old
Washington Mutual assets that the bank is not replacing when they
mature. JPMorgan bought Washington Mutual at the height of the
financial crisis after it failed.
But the bank is consciously trying to limit its new business in
areas where profitability is shrinking. For example, JPMorgan made
just $17 billion mortgages in the first quarter, down from $52.7
billion in the same quarter last year. That nearly 70 percent drop
is steeper than the 57 percent decline that the Mortgage Bankers
Association expects for the industry in the first quarter, mainly as
a result of the reduced appeal of refinancing because of higher
Speaking to investors in February, JPMorgan's Consumer and Community
Banking CEO Gordon Smith said that there is a lot of competition in
mortgage lending now as volume shrinks, and the bank is trying to
determine how much business it wants there.
JPMorgan's total loan growth lags the overall market, Federal
Reserve data show. Loans across the U.S. banking system rose about
3.5 percent from the final week of March 2013 to the last week of
Overall volume of loans to companies has been growing fast, Fed data
show: commercial and industrial loans on banks' books were 7.8
percent higher at the end of March from a year earlier.
In the riskiest part of that market, namely junk-rated loans to
companies, quality has weakened, and deals are put together in a way
that reduces protection to investors.
In loans to companies, JPMorgan is increasingly seeing competition
from private equity firms and other lenders outside of the banking
About $1 billion of loans that JPMorgan made to companies with weak
credit quality have been refinanced by non-banks, Doug Petno, chief
of the bank's commercial banking, said in February.
Wells Fargo's Sloan said he has seen increasing competition from
non-banks as well, but added that Wells Fargo's ability to sell a
wide range of products to customers has prevented it from losing too
In the first quarter, companies took out $8.6 billion of second-lien
loans, which are riskier as they provide lower recoveries to lenders
in a default. That is the fifth-highest level on record and a 25
percent increase over each of the past two quarters, Thomson Reuters
LPC data show.
(Reporting by David Henry in New York, additional reporting by
Lauren Tara LaCapra, Peter Rudegeair and Michelle Sierra in New
York; writing by Dan Wilchins; editing by Martin Howell)
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