Price: 55.67 | Ch: -1.73 (-3.1%)
For the first time in over two years, and only the fifth time in a decade, JPMorgan Chase & Co. (NYSE: JPM) missed earnings forecasts when it posted first-quarter 2014 results Friday.
Investors were prepared for a slip in earnings compared with Q1 of 2013. In February, JPM cautioned trading revenue was weak. The warning was especially troubling because the first quarter is traditionally a strong one.
But Q1 of 2014 wasn’t just weak – it was JPM’s worst quarter since 2008, during the depths of financial crisis.
Chief Executive Officer Jamie Dimon acknowledged “industry headwinds” in the largest U.S. bank’s markets and mortgages. Yet he remains confident about the economy.
“We have growing confidence in the economy – consumers, corporations and middle market companies are in increasingly good financial shape and housing has turned the corner in most markets – and we are doing our part to support the recovery. JP Morgan Chase provided credit and raised capital of over $450 billion for our clients during the first quarter of 2014, which included $5 billion for U.S. small businesses,” Dimon said in the earnings release.
Following are highlights from the bank’s first quarter.
10 Key Takeaways from JPM’s Q1 Earnings
- JPM earned $1.28 per share, 12 cents shy of the $1.40 analysts were expecting, and down from $1.59 per share in the same quarter a year ago.
- Net income fell 19% to $5.27 billion, down from $6.53 billion year over year.
- Revenue dropped 8% to $22.99 billion, down from $25.12 billion a year earlier. That missed projections of $24.43 billion.
- Revenue from trading fixed income, currencies, and commodities fell 21% to $3.8 billion compared with the same period in 2013. That was steeper than the 15% decline JPM projected in February. Waning performance in fixed-income trading – once a catalyst of earnings growth among investment banks – highlights how new regulations and changes in investor sentiment is affecting the segment.
- Mortgage originations plummeted 68% over the year to $17 billion, down from $52.7 billion a year ago, amid a slowdown in mortgage refinancing.
- Mortgage banking net income fell to $114 million in the quarter, a drop of $559 million from the year-earlier period.
- Headcount in the bank’s mortgage units was clipped by 14,000, or 30%, since the beginning of 2013.
- Investment banking net income slipped 15% from the same quarter a year ago.
- Net income at JPM’s consumer bank fell 25% to $1.9 billion.
- The bank’s supplementary leverage ratio, a measure of a bank’s capital compared with its assets, stood at 5.1% at the end of Q1. That number has taken on new importance since Tuesday, when the U.S. Federal Reserve approved new rules requiring U.S. banks to boost their capital requirement and also set a higher minimum of 6% for a company’s insured bank subsidiary. So, JPM will have to raise its ratio.
What’s Next for JPM and Its Stock
JPM weathered the 2007 mortgage meltdown and 2008 financial crisis better than most of its industry peers.
The NYC-based bank, however, has been besieged over the last several years by a spate of massive legal settlements that not only tarnished the bank’s once stellar reputation, but also cost it billions.
A whopping $13 billion was paid last year to the Justice Department, Freddie Mac, and Fannie Mae over mortgage-backed securities. JP Morgan also recently shelled out $920 million to settle regulatory probes into the 2012 “London Whale” trading debacle, which resulted in losses of $6 million for the bank.
With those issues out of the way, investors are hoping better days lie ahead for JPM.
Indeed, the bank just announced a $0.02 increase to its common stock dividend from $0.38 per share to $0.40 per share in Q2. JPM also authorized the repurchase of $6.5 billion of common stock through Q1 of 2015.
“We will dedicate extraordinary effort in 2014 adapting to the new global financial architecture, and we will continue to make significant progress on our control agenda. We face the future with a strong foundation, a fortress balance sheet and excellent franchises built to serve our clients,” Dimon concluded.
But, a changing economic landscape could weigh on JPMorgan stock.
Rising interest rates, along with rising home prices, will likely continue to pressure JPM’s mortgage unit. And, altered investors’ attitudes will likely continue to pressure JPM’s trading arm.
JPM stock, which recently topped $61 to trade at their highest level in 13 years, was down 3% at $55.60 shortly before noon.
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