JPMorgan - Steady Quarter On The Back Of The Housing Recovery

| About: JPMorgan Chase (JPM)

Shares of JPMorgan (JPM), one of the largest banks in the US, lost 1.1% in Friday's trading session. Before the market open, the bank reported its third quarter results.

Third Quarter Results

JPMorgan reported third quarter revenues of $25.9 billion, up 6% on the year. Revenue growth came as a surprise to analysts, who expected the firm to generate $24.5 billion in revenues.

The bank reported a net profit of $5.71 billion, up 34% on the year. Earnings came in at $1.40 per diluted share, coming in ahead of analysts expectations of $1.20 per share. Earnings per share were up 37% on the year.

The low interest environment is hurting the banks, as it narrows the bank's interest margins. JPMorgan's net interest margins compressed by 23 basis points to 2.43% on the year. Lower margins, were more than offset by improvements in credit trends and the housing industry. The firm released $900 million in loan-loss reserves in the mortgage department.

Chairman and CEO Jamie Dimon commented on the results, "The firm reported strong performance across all our businesses in the third quarter of 2012. Revenue for the quarter was $25.9 billion, up 6% compared with the prior year, or 16% before the impact of DVA. These results reflected continued momentum in all our businesses."

Segmental Information

Investment Banking

Revenues for the investment banking division fell 1% on the year to $6.28 billion. Net income for the division fell 4% to $1.57 billion. Investment banking fees rose 38% to $1.4 billion, driven by strength of debt and equity underwriting fees. Fixed income and equity markets revenues came in unchanged at $4.8 billion. The firm paid out 32% of its total revenues in compensation expenses, and the firm was ranked number 1 in Global Investment Banking Fees.

Retail Financial Services

Revenues for the retail financial services division were up 6% on the year to $8.01 billion. Net income rose 21% to $1.41 billion. Net interest income fell 5% to $3.9 billion as a result of lower deposit margins and lower loan balances. Non-interest revenues rose 19% to $4.1 billion, driven by higher mortgage fees and other income.

Consumer & Business banking reported a 23% decrease in net profits to $785 million. Revenues fell 7% to $4.3 billion. Total deposits rose 9% to $393.8 billion. Deposit margins fell by 26 basis points to 2.56% as interest rates remained low. The impact of the Durbin Amendment impacted the results.

The mortgage division reported net profits of $563 million, up significantly from last year. Mortage revenues were up 36% to $1.8 billion. Wider margins and higher volumes driven by the "HARP" (Home Affordable Refinance Programs) boosted the division's performance. Total mortgage loan originations for the quarter rose 29% to $47.3 billion.

CEO Dimon commented, "The housing market has turned the corner. We were encouraged that credit trends continued to modestly improve, and, as a result, the firm reduced the related loan-loss reserves by $900 million."

Card Services & Auto

Revenues for the card services & auto division fell 1% to $4.7 billion. Net income rose 12% to $954 million as a result of falling non-interest expenses. Credit card net charge-off rates were falling, compared to last year and the last quarter. 30-Day delinquency rates came in at just 2.15%. In total the firm opened 1.6 million new credit card accounts, bringing the total to 63.9 million.


JPMorgan grew its balance sheet by 1% over the past year to $2.32 trillion. The company ended its third quarter with $135 billion in Basel I Tier-1 common capital, resulting in a Tier-1 common ratio of 10.4%. Based on Basel III metrics, the Tier-1 ratio came in at 8.4%.

For the first nine months of 2012, the bank generated revenues of $73.4 billion, down 3% on the year. Net profits rose by 2% to $15.6 billion, despite the trading losses in the firm's London unit. As a result of share buybacks, earnings per share rose 7% to $3.81 per diluted share.

The market values JPMorgan at $158 billion. Based on an annual revenue estimate just shy of $100 billion, this values the firm at 1.6 times annual revenues. The bank is on track to earn $5.00 per diluted share for the full year of 2012, valuing JPMorgan at 8 times earnings.

Currently, JPMorgan pays a quarterly dividend of $0.30 per share, for an annual dividend yield of 2.9%.

Investment Thesis

Year to date, shares of JPMorgan have risen some 25%. Shares started out at $33 per share in January and quickly advanced to $46 in March after the company boosted its quarterly dividend by 20%. Shares fell back sharply to $31 in June after the company reported trading losses of $6.2 billion executed by the "London Whale". The company took prompt steps in cutting the position and replacing key people, and the bank re-gained trust from investors. Shares steadily rose back, now exchanging hands at $42 per share.

Over the past five years, shares have lost some 10%. Despite the poor market conditions, the bank reported a net profit each year, and it has outperformed all of its major competitors. Shares traded at highs of $50 in 2008, to reach lows of $15 in 2009. From that point in time shares traded around the $40 mark, with some temporary deviations from the level.

Between 2008 and 2012, the company managed to increase its earnings each sequential year, assuming a decent performance in the fourth quarter of 2012. Dividend payouts, totaling $1.20 per annum are still below 2008's payment of $1.52 per share.

Investors are obviously not very happy if banks lose billions of dollars, but the impact on JPMorgan has been relatively modest. When the firm announced the losses earlier this year, it aggressively cut back on the position, clawed back bonuses, and fired the responsible people. Shares quickly rose back, trading just 10% shy of the highs of the year. Before the trading losses were announced, the bank already pledged to repurchase up to $15 billion in stock over the next year, and Dimon is keen to re-ignite the program which got suspended after the losses.

Of interest is the bank's increased risk tolerance towards Europe. The net exposure to peripheral European nations almost doubled over the last quarter from $6.2 billion to $11.7 billion. The firm reduced short positions on its CIO credit portfolio.

Despite the low interest margins, the bank is in relative good shape. The recovery in the US housing sector is having a favorable impact to the bottom line and the bank's ability to please shareholders. Expect to see buyback announcements in the short-to-medium term, which act as a boost to the share price. Furthermore investors receive a nice dividend yield of almost 3% per annum. Investors traditionally like investing in banks given the relative high dividend yield paid by the stocks.

I don't have to remind you of the risks involved when investing in bank stocks. The range of risks threatening shareholder's investments include trading losses, sovereign debt crises, severe crashes in asset classes and counterparty risk, among others. Investors have a good time, until the music stops.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Money Center Banks, Earnings
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