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 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 afternoon trading.
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 year.
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.
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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)
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