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Summary

  • Earnings and revenue declined with respect to this time last year.
  • I bought a small batch of the stock this morning because revenues and earnings increased from last quarter, and I feel it can be a good start to a turnaround.
  • The stock yields 2.75% at these levels.

The last time I wrote about JPMorgan Chase & Co. (NYSE:JPM) I stated:

"Due to the stock being overbought, 2015 earnings estimate cuts, and declining return on equity, I will not be pulling the trigger here right now and will choose to reevaluate if the dividend yield gets closer to 3%."

Since that article was published, the stock is up 0.64% (3.52% of that move came today on the back of earnings and was down as low as 4%), while the S&P 500 (NYSEARCA:SPY) is up 1.14%. It's safe to say that I saved some heartache by not putting on a position back then. JPMorgan is a financial holding company and is engaged in investment banking, financial services for consumers and small business, commercial banking, financial transaction processing, asset management and private equity.

The company reported earnings before the market opened on 15Jul14 and on the surface the results were excellent with the company reporting earnings of $1.59 per share (beating estimates by $0.30) on revenue of $25.3 billion (beating estimates by $1.54 billion). The stock increased 3.52% the day it reported earnings and what I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Consumer & Community Banking

2Q14

1Q14

2Q13

Q/Q

Y/Y

Net revenue

$11,431

$10,460

$12,015

9%

-5%

Provision for credit losses

$852

$816

$(19)

4%

4584%

Noninterest expense

$6,456

$6,437

$6,864

0%

-6%

Net income

$2,443

$1,936

$3,089

26%

-21%

This segment of the bank accounts for the lion's share of revenue, accounting for 45%. This segment houses credit cards; auto, education, and home loans; and retirement & investing under its umbrella. The biggest thing I noticed in this segment of the bank was that provisions for credit losses increased 4584% ($871 million) from the prior year. The increase in provision was due to a $357 million reduction in the allowance for loan losses and total net charge-offs. Another astronomical figure is the 21% drop in net income from last year, which was in large part due to the increased provisions and lower net revenue; however, that number did increase from last quarter.

Corporate & Investment Bank

2Q14

1Q14

2Q13

Q/Q

Y/Y

Net revenue

$8,991

$8,606

$ 9,876

4%

-9%

Provision for credit losses

$(84)

$49

$(6)

-271%

1300%

Noninterest expense

$6,058

$5,604

$ 5,742

8%

6%

Net income

$1,963

$1,979

$2,838

-1%

-31%

This segment of the company accounts for 35% of revenues. The first eye popping thing I see is decreased provisions for credit losses, a benefit to the tune of $78 million, and benefit difference of $133 million from last quarter. However, net income decreased a whole 31% from last year primarily due to lower revenue in addition to higher noninterest expense.

Commercial Banking

2Q14

1Q14

2Q13

Q/Q

Y/Y

Net revenue

$1,701

$1,651

$1,728

3%

-2%

Provision for credit losses

$(67)

$5

$44

-1440%

-252%

Noninterest expense

$675

$686

$652

-2%

4%

Net income

$658

$578

$621

14%

6%

Commercial Banking is responsible for about 7% of all revenues. The main thing I see in this segment is provision for credit losses dropped 252% from the prior year ($111 million) and 1,440% ($72 million) from the prior quarter.

Asset Management

2Q14

1Q14

2Q13

Q/Q

Y/Y

Net revenue

$2,956

$2,778

$2,725

6%

8%

Provision for credit losses

$1

$(9)

$23

111%

-96%

Noninterest expense

$2,062

$2,075

$1,892

-1%

9%

Net income

$552

$441

$500

25%

10%

Looking at Asset Management (which accounts for about 12% of revenues), what strikes me as compelling is that provision for credit losses decreased 96% from the prior year ($22 million) while increasing 111% from the prior quarter ($10 million). Net income increased 10% from last year on the back of higher net revenue thanks to client inflows and the effect of higher market levels and a 1% increase to net interest income because of higher loan and deposit balances. Net income was also 25% higher than the previous quarter.

Corporate/Private Equity

2Q14

1Q14

2Q13

Q/Q

Y/Y

Net revenue

$270

$368

$(386)

-27%

170%

Provision for credit losses

$(10)

$(11)

$5

9%

-300%

Noninterest expense

$180

$(166)

$716

208%

-75%

Net income

$369

$340

$(552)

9%

167%

This segment of the company only accounts for 1% of all revenues. On this side of the business net revenue increased 170% when compared to last year but decreased 27% from the prior quarter. Provision for credit losses decreased 300% from last year while noninterest expense decreased 75% in the same timeframe but increased 208% from the prior quarter. All this added up to give the segment a 167% increase in net income from last year, or a 9% gain from last quarter.

Conclusion

JPMorgan Chase

2Q14

1Q14

2Q13

Q/Q

Y/Y

Net revenue

$25,349

$23,863

$25,958

6%

-2%

Provision for credit losses

$692

$850

$47

-19%

1372%

Noninterest expense

$15,431

$14,636

$15,866

5%

-3%

Net income

$5,985

$5,274

$6,496

13%

-8%

Tangible Book Value

$43.17

$41.73

$39.97

3%

8%

EPS

$1.46

$1.28

$1.60

14%

-9%

The increase in provision for credit losses for the company as a whole was at 1,372% or $645 million is not great in my eyes. Not only did provisions for credit losses increase, what I don't like is that earnings per share decreased 9% from the prior year but increased 14% from the prior quarter. The 14% increase in earnings may mark a turnaround in the bank. Personally I don't like that total revenue for the company decreased 2% from last year but the 6% increase from last quarter is pretty good. If there was a bright spot, it was that tangible book value increased 8% from last year. JP Morgan's share price was up 6.33% from the prior earnings release excluding dividends.

The results of this quarter were obviously outstanding to investors as was evidenced in the share price of the stock, jumping 3.52% after reporting, albeit I believe at the expense of lowered expectations. The combination of decreased earnings and decreased revenues makes me cringe. Although the company reported results less than stellar from last year, the results were great with respect to last quarter and that's why I believe the market cheered the results. I have mixed emotions about the results but I will admit I bought a small stack of shares this morning on the hopes that these results can propel the company going forward.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: I Have Bittersweet Emotions About JPMorgan's Earnings