One of the creatures from Jekyll Island, JPMorgan Chase & Co. (NYSE:JPM), kicked off bank earnings by announcing an improvement in M&A and underwriting. The super-sized bank reported a 47% rise in profits — or $4.8 billion ($1.12 a share) on revenues of $26.1 billion versus earnings of $3.3 billion ($0.74 a share) on revenues of $24.3 billion a year earlier [see call transcript].
Shares are up ~1.75% to start the trading day.
What do we think?
JPMorgan handsomely beat Wall Street expectations for $1.00 a share in earnings on revenues of $24.2 billion. As we noted in our “Preview: Cheat Sheet to JPMorgan Earnings“, JPM improved key metrics including credit loss provisions ($3.0 billion, down by $5.9 billion, or 66%, from the prior year) and loan growth:
- End-of-period Business Banking loans were $16.8 billion, down 1% from the prior year and up 1% from the prior quarter; originations were $1.4 billion, up 114% from the prior year and 27% from the prior quarter.
- Mortgage loan originations were $50.8 billion, up 46% from the prior year and 24% from the prior quarter.
- Average auto loans were $48.3 billion, up 7% from the prior year; originations were $4.8 billion, down 19% from the prior year and 21% from the prior quarter.
CEO Jamie Dimon noted:
Solid performance in the quarter and for the year reflected good results across most of our businesses, which benefited from strong client relationships and continued investments for growth. Credit trends in our credit card and wholesale businesses continued to improve. In our mortgage business, while charge-offs and delinquencies have improved, credit costs still remain at abnormally high levels and continue to be a significant drag on our returns.
We continued to strengthen our fortress balance sheet, ending the year with a strong Tier 1 Common ratio of 9.8%. By 2019, banks will be expected to maintain a Tier 1 Common ratio of 7% under Basel III – we estimate that our ratio is approximately 7% this quarter. Our total firmwide credit reserves declined to $33.0 billion, resulting in a firmwide coverage ratio of 4.5% of total loans1. We are confident that we have the earnings power to generate substantial capital, well beyond what we will need to prudently grow our business.
What are the risks going forward?
JPMorgan is obviously heavily dependent on the economic recovery. However, noninterest expense was up $4.0 billion (34%) to $16.0 billion largely due to increased litigation reserves, including those for mortgage-related matters. This could become a problem as last week he Supreme Judicial Court of Massachusetts has voided the seizure of homes because Wells Fargo (NYSE:WFC) and US Bancorp (NYSE:USB) “failed to show they held the mortgages at the time they foreclosed.”
As has been the deal with banks, much more time is needed to finish healing from the economic crisis.