Overall industry weaknesses failed to dampen JPMorgan Chase & Co.’s (JPM) earnings strength in fourth-quarter 2014. The banking giant came out with adjusted earnings of $1.45 per share, ahead of the Zacks Consensus Estimate as well as the prior-year quarter earnings of $1.30 per share.
Earnings exclude an impact of $990 million related to after-tax legal expenses. Considering this significant one-time item, the company has earned $1.19 per share.
Legal charges aside, JPMorgan’s operating expenses were down substantially, depicting success of its cost-saving initiatives. However, improvement in net interest income was more than offset by a fall in non-interest income. Also, provision did not work in favor.
Further, for 2014, earnings of $5.29 per share missed the Zacks Consensus Estimate of $5.42. However, this compared favorably with $4.35 earned in 2013.
Shares of JPMorgan lost nearly 2% in the pre-trading session, indicating that the market is not quite encouraged with the earnings beat. The price reaction during the trading session will give a better idea about how investors felt about the results.
While Corporate & Investment Bank segment showed year-over-year improvement in net income, Commercial Banking, Corporate/Private Equity, Asset Management and Consumer & Community Banking witnessed deterioration.
Most noticeably, consumer and corporate deposits, card sales volume, client investment assets, and business banking loan originations showed year-over-year improvement. Corporate & Investment Bank earned 3% more than the prior-year quarter and maintained its #1 rank in Global Investment Banking fees. It also had a #1 rank in global debt, equity and syndicated loans for 2014.
Quarter in Detail
Managed net revenue of $23.6 billion in the quarter was down 2% from the year-ago quarter. It also compared unfavorably with the Zacks Consensus Estimate of $23.7 billion.
Managed non-interest revenues were down 6% from the year-ago quarter to $12.2 billion. However, net interest income climbed 2% to $11.6 billion, primarily reflecting the impact of higher investment securities yields and lower interest expenses, partially offset by lower loan yields.
Non-interest expense was $15.4 billion, down 1% from the year-ago quarter. Decline was due to lower non-interest expense in Mortgage Banking, largely offset by higher expense in Corporate & Investment Bank. The reported quarter included $1.1 billion of legal costs.
Credit Quality
JPMorgan’s credit quality depicted a mixed bag during the quarter. As of Dec 31, 2014, nonperforming assets were $8.0 billion, down 18% from $9.7 billion a year ago. Consumer net charge-offs decreased 8% year over year to $1.2 billion. As a result, the consumer net charge-off rate improved to 1.28% from 1.44% a year ago.
However, provision for credit losses was $840 million, up significantly from $104 million in the year-ago quarter. Total consumer provision for credit losses amounted to $946 million compared with $65 million in the year-ago quarter.
Capital Position
JPMorgan’s capital ratios also showed improvement. Tier 1 capital ratio was 11.6% as of Dec 31, 2014, compared with 11.5% as of Sep 30, 2014. Tier 1 common equity capital ratio was 10.2% as of Dec 31, 2014, in line with Sep 30, 2014.
Book value per share was $57.07 as of Dec 31, 2014 compared with $56.50 as of Sep 30, 2014 and $53.25 as of Dec 31, 2013. Tangible book value per common share came in at $44.69 as of Dec 31, 2014, compared with $44.13 as of Sep 30, 2014 and $40.81 as of Dec 31, 2013.
In Our View
The recent calls from critics and analysts to break up the nation's largest bank in order to enhance its value do not seem to hold water. We believe that JPMorgan’s impressive performance, despite tough industry backdrop and legal headwinds, exhibit its ability to emerge victorious amid all odds.
JPMorgan is on track to reduce costs through realignment of its business and job cuts. The banking behemoth is also striving hard to regain its top-line strength. However, nagging legal issues, though reduced, and a prevalent tough industry backdrop, would continue to curb the company’s bottom-line improvement.
Further, pressure on interest margin with no chance of interest rate hike in the near term and the impact of a stringent regulatory environment might mar JPMorgan’s results going forward. Nevertheless, improving retail and business banking, and rising credit trends are expected to work in its favor.
Wells Fargo & Company (WFC) has kick started the Q4 earnings season today with JPMorgan following suit. The results of these two companies exhibit an impressive start to bank earnings.
Other Wall Street biggies like Bank of America Corp. (BAC) and Citigroup Inc. (C) are scheduled to release results on Jan 15.
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