The fourth quarter promises to show earnings generally flat with last year. The big exception to this is going to be the banking industry. Big profit gains by many large banks will give a big lift to the S&P 500 index, and provide momentum for solid bank gains in 2013.
On the back of an expanding mortgage business, improving customer credit profiles, improved investment banking conditions, and sharply lower credit costs, JPMorgan Chase (JPM) released very strong fourth quarter 2012 earnings of $5.3 billion, or $1.39 per share. This was a gain of 53% from the $0.90 per share in earnings from the fourth quarter of 2011, and a full $0.20 above analysts' expectations for the quarter. What went right? Nearly everything. For all of 2012, JPMorgan reported earnings available to common shareholders of $19.9 billion, or $5.20 per share, a 16% jump from 2011.
The only real downside in the fourth quarter was in the revenue area. The $23.6 billion, while 10% above the year ago quarter, was below expectations of $24.21 billion. But more important to me, is JPMorgan reported the quality of earnings it did while still having an overall loss on its "one time" factors. Those included a loss of $900 million pretax for mortgage related litigation and settlements, a debit valuation adjustment loss of $620 million, and a $700 million pretax gain from lighter loan loss reserve provisions. The after tax impact of these netted to a loss of $0.19 per share. And, while JPMorgan's interest rate spread is less important to it than it is to most banks owing to JPMorgan's large investment banking unit, its net interest spread of 2.44% was down 12 basis points from the prior quarter and 32 basis points from the year earlier. As a result, net interest income fell by $220 million, or 3% from the year ago.
Good news included solid performance from the investment banking unit, with quarterly earnings of $2.0 billion, up by nearly double from the $1.03 billion income in last year's fourth quarter. Both this quarter and the quarter a year ago's result included similar sized debit valuation adjustments. The Consumer / Community Bank's card and merchant services division earned $840 million, down $211 million from the fourth quarter of 2011 when the division benefited from a $500 million loan loss provision reversal. The mortgage banking division's income was under pressure from JPMorgan's $700 million contribution of cash settlement in the recent omnibus mortgage settlement. Even with that, the unit earned $418 million in the fourth quarter, versus a loss of over $200 million a year ago. The mortgage unit wrote about $51 billion in originations, up 33% from a year ago.
JPMorgan's stock price and overall culture seems to have fully recovered from the $6.2 billion London Whale trading debacle in the second quarter of 2012. The incident actually saved the bank $10 million in the form of a lowered bonus to CEO Jamie Dimon. Looking ahead, JPMorgan has a nice capital cushion with a Basil III ratio of 8.7%, and will undoubtedly be approved to continue buying stock and increase its dividend in the Fed's Stress Test, the results of which should be released next month. But its overall profit growth is likely to be lackluster at best, with single digit increases likely. The bank pretty much hit on most cylinders this past quarter, with a return on equity of 0.98%, and I do not expect a bank of JPMorgan's scope and footprint to post a return on equity much higher than 1.0%.
M&T Bank (MTB) had an excellent quarter, with earnings roughly doubling from the fourth quarter of 2011. Net came to $296 million, or $2.16 per share, versus the $148 million, or $1.04 per share in the fourth quarter of 2011. For all of 2012, earnings came to a record $1.03 billion, or $7.54 per share. This was a 19% jump from the 2011 numbers. The stunning fourth quarter result, with its return on equity of 1.45%, was fueled by mortgage income and declining reserve provisions. Just as impressive is the ability of M&T to have a much smaller bite taken from its net interest spread than most of its competitors. The bank's 3.73% net interest margin was three basis points lower than the third quarter of 2012, but was even with the fourth quarter of 2011.
M&T will get a further lift in 2013 from its acquisition of Hudson City Bancorp (HCBK), which should be by no later than the second quarter of 2013. The acquisition will increase M&T's loan portfolio by over $20 billion, and add some needed capital. Like many regional banks, M&T does not release its Basil III estimates, but its Tier One common equity stood at just 7.57% at the close of 2012. While comfortably over the 6.0% that regulators regard as "well capitalized", M&T's capital ratio trails most other large regional banks.
I like M&T a great deal over the next six to 12 months, at the very least. I believe it can maintain the recent earnings momentum with help from the Hudson City deal, and look for earnings up around $8.30 per share in 2013. I also expect a modest dividend increase early this year.
First Republic (FRC), one of the nation's largest private banks, also released positive earnings. Due to a string of acquisitions, First Republic's earnings are a bit complicated, but discounting the effects of purchase accounting, earnings in the fourth quarter came to $89.3 million, up 53% from the same quarter of 2011. Due to share issuance, the per share earnings for the fourth quarter came to $0.61 per share, up 39% from the fourth quarter of 2011. For all of 2012, core earnings, excluding myriad one-time factors, the bulk of which were positive, earnings came to $2.15 per share, up 28% from the same "core earnings" measurement from 2011.
First Republic's secondary numbers are very impressive. Its 2012 efficiency ratio was 56.2, and its credit underwriting is stellar, as befits a private bank. The company's loan portfolio stood at the end of 2012 at about $28 billion, compared with $22.2 billion a year earlier. Its loan loss reserve stood at $130 million. For all of 2012, First Republic's return on assets was 1.2%. The downside is that without further acquisitions, there is little to improve on First Republic's books, and its dividend yield of 1.2% is below par for the banking sector. Wall Street anticipates 10% annual profit growth going forward, but again, absent acquisitions, I do not see it.