JPMorgan (JPM) reported first quarter earnings per share of $1.59 on top line revenue of $25.848 billion and net income of $6.5 billion. Earnings beat analysts' consensus estimate for the quarter by $0.20.
Top line revenue increased 6% from the fourth quarter of 2012. Net income was up 15% from the previous quarter. Earnings per share also improved quarter-over-quarter, adding 14%.
First quarter results appeared to show improvement in profitability for the bank compared to the previous quarter, signaling that losses from the London Whale Episode are having less effect on the company's bottom line. First quarter top line revenue improved 6% compared to a 6% decrease in the fourth quarter of 2012. Net income was up 15% in the first quarter compared to flat lined growth in the previous quarter. Earnings per share also gained 14% in the quarter compared to a 1% decrease in the previous quarter.
In the first quarter the company reported significantly better results and appears to be appropriately dealing with two issues at the forefront of its procedural operations. The London Whale Episode, which caused $6.2 billion in losses for the bank, appears to be in control. Corporate actions on the company's pending Comprehensive Capital Analysis and Review are also transparent, helping to minimize stock price impact.
Value-at-risk results for the quarter exemplified the improvements to the company's Synthetic Credit Portfolio. JPMorgan's Corporate and Investment Bank Trading and Credit Portfolio VaR has decreased from $122 million in the third quarter of 2012 to $62 billion in the first quarter of 2013. Specifically in the Credit Portfolio, the VaR decreased from $22 billion in the third quarter of 2012 to $15 billion in the first quarter of 2013. These improvements brought the Total VaR for the company down $42 million, from $115 million in 3Q 2012 to $73 million in 1Q 2013.
The company's most recent results from the Federal Reserve's Comprehensive Capital Analysis and Review are a second area of attention for the firm. The CCAR is done annually on a selected set of bank holding companies. It tests their current capital adequacy as well as their forward-looking plans. The Federal Reserve announced the results of its most recent CCAR on March 14 and indicated further attention needed for specific areas of JPMorgan's plan as outlined below.
The Federal Reserve did not object to the capital plans of The Goldman Sachs Group, Inc. and JPMorgan Chase & Co., which are both listed in the "Conditional non-objection to capital plan" column. However, each of these BHCs exhibited weaknesses in its capital plan or capital planning process that were significant enough to require immediate attention, even though those weaknesses do not undermine the quantitative results of the stress tests for that firm or the overall reliability of the firm's capital planning process. As a condition of the Federal Reserve's non-objection to their capital plans, each of these BHCs is required to remediate immediately the weaknesses identified in its capital plan and capital planning process and to resubmit a capital plan to the Federal Reserve by the end of the third quarter of 2013.
In comments on first quarter earnings, management reported that the company has appropriate resources in place to manage the CCAR. The majority of the additional material requested is focused on qualitative detail. JPMorgan has formed a CCAR group to manage the conditional resubmission and that group is tasked with providing more granular forward-looking reporting detail to the Federal Reserve.
Despite these two operational issues, JPMorgan's core businesses continued to show positive improvement in the first quarter. Corporate and Investment Banking, Consumer and Community Banking and Asset Management all showed strong net income improvements for the quarter.
While the company's Corporate and Investment Bank division showed the best performance in the first quarter, it also continues to face CCAR resolution and Synthetic Credit Portfolio trading risks. Despite these issues the division posted total revenue of $10.14 billion, with the greatest contribution from Markets and Investor Services. Net income for the quarter was $2.6 billion and accounted for 40% of the firm's profit.
Consumer and Community Banking was the second best performing group for the company. Representing 40% of the firm's assets, the division's net income improved 28% from the previous quarter. Asset management, Administration and Commissions showed the greatest revenue growth for the quarter increasing 8% to $533 million.
Overall, the company's top two core banking divisions outperformed for the quarter and have positive outlooks for the year. Transparency around the two issues the company currently faces appears to be controlled and on track for resolution in the second quarter. All of these positive factors should help the company maintain its current levels of growth.
Given steady state growth the stock has a price target1 of $49.72. At $49.01 it appears fairly valued with some upside potential and, excluding any major surprises in London Whale litigation or CCAR resolution, should continue trading evenly in the near-term.
1 The price target is derived from Bodie, Kane and Marcus' intrinsic value formula. The intrinsic value formula discounts the projected one-year future cash flow value by the risk-free rate on the one-year Treasury note plus a beta of 1.35 times the market's expected one-year risk premium. The risk premium is based on the one-year projected return of the Dow Jones Industrial Average.