JPMorgan Chase (NYSE: JPM) reported record results for the first quarter of the year, despite low interest rates continuing to undercut its profits. CEO Jaime Dimon has expressed confidence that the bank's performance would continue to improve as the US economy continued to grow healthier and the housing market recovers. Share prices have appreciated by nearly 9% since the release of the earnings report. Does this mean that it is time for investors to add JPMorgan stock to their portfolios?
Record First Quarter Earnings
JPMorgan reported that its net income increased by 33% to $6.5 billion from the $4.9 billion reported in the same period last year and by 14% from the $5.7 billion in the fourth quarter of 2012. The results easily exceeded Wall Street analysts' expectations of $5.4 billion net income. This brought earnings per share to $1.59, which also beat expectations by $0.20.
The earnings were boosted by positive results in the bank's investment banking business. According to industry analytics company Coalition, JPMorgan generated the highest investment banking revenues for the quarter with $6.9 billion, which put it ahead of rivals such as Citigroup (NYSE: C) and Bank of America Merrill-Lynch (NYSE: BAC), which had to share a four-way tie for second place with Goldman Sachs (NYSE: GS) and Deutsche Bank. The bulk of the bank's $4.3 billion in revenues from the business came from its trading activities in fixed income, currencies and commodities (FICC), which accounted for some 62% of total revenues. For 2012, JPMorgan also generated the highest investment banking revenues with $24.1 billion.
In addition, earnings were also driven by an increase in the bank's mortgage originations, which increased by 37% during the quarter to $52.7 billion from $38.4 billion in the same quarter last year, reflecting an increase in the bank's market share. However, overall profits of the mortgage banking group still declined 31% to $673 million due to declines in revenues from mortgage production and servicing, while pre-tax net income fell to $427 million.
Other factors that helped improve earnings were the bank's accounting decision to reduce reserves for credit card loans and mortgages, which resulted in a net gain of $0.18 a share, as well as cutting back on funds allocated for legal expenses by $2.4 billion. The bank justified its decision to reduce litigation expenses to close to nothing buy saying that it had already allocated so much for this purpose in the previous quarters.
What are the prospects for JPMorgan's business in the medium-term?
The outlook for its mortgage business remains mixed despite the increase in mortgage originations reported during the quarter. As mortgage rates move upward from the lows recorded late last year, the boom in refinancing of home loans is seen to dry up. According to the Mortgage Bankers Association, refinancing loans accounted for more than 70% of mortgage originations in 2012, but are expected to decline to 58% in 2013 and 34% in 2014.
However, new home loans were seen to be increasing, although modestly, spurred by mortgage rates that have fallen to near-record lows. According to a report from the Commerce Department, April sales of new homes rose by 2.3% from the previous month to a seasonally adjusted yearly rate of 454,000, which was close to the fast rate recorded in five years. When measured on a year-to-year basis, April new home sales rose 29% over the past year, although they are still below the 700,000 rate increase, which is considered consistent with a healthy real estate market. The MBA estimated that new mortgages would increase slightly from $503 billion in 2012 to $592 billion in 2013 and $703 billion in 2014.
JPMorgan has also been seeing successes in its other business segments. Its auto loans segment increased by 12% to $6.5 billion from the same period last year. Auto loans are expected to resurge due to a number of factors, including low interest rates and looser lending standards as fewer auto lenders go into default, and this presents a great opportunity for JPMorgan who has lost market share in the sector in recent years. According to credit reporting agency Experian, the bank is the fourth largest US auto lender. The bank recently named a new head of auto finance in an attempt to boost its lending in the sector.
In addition, its cost-cutting initiatives could help boost its bottom line. The bank announced moves to slash expenses by $1 billion through some 4,000 job cuts this year as well as other cost cutting measures. It also planned to reduce employees in its mortgage banking unit by 13,000 to 15,000, most of which were contractual workers.
The Bottom Line
Although many analysts questioned the accounting practices used by JPMorgan to pad its earnings results, the fact remains that its fundamentals remain strong enough that the bank would be able to continue generating earnings as well as competing in an increasingly tight market. JPMorgan remains the biggest bank in the US, with $2.4 trillion in assets and $1 trillion in total deposits, as well as operations in over sixty countries. With its revenues coming from a diversified mix of sources, including investment banking and asset management, the bank is unlikely to suffer reductions in its profitability from downturns in any segment.
In addition, the bank seems to have successfully surpassed the biggest scandal in its recent history, the loss of billions from London Whale trades, as Standard & Poor's recently upgraded the bank's credit outlook to stable from the negative it received following the immediate aftermath of the scandal.
Investors should also consider that the bank remains the cheapest large cap bank, with a P/E ratio of just 9.67, the lowest among its major competitors, whose P/E ratios all exceed 10 while the industry average is around 22.