Huge Earnings Miss: Is JPMorgan (JPM) Keeping Well? - Analyst Blog

As expected, JPMorgan Chase & Company JPM failed to override the tough backdrop that banks have been enduring since the year started and delivered a negative earnings surprise of 9.2%. The banking giant came out with earnings of $1.28 per share, missing the Zacks Consensus Estimate of $1.41 by a wide margin. This is also a massive deterioration from the year-ago number of $1.59.

Our quantitative model did not conclusively predict that JPMorgan will beat the Zacks Consensus Estimate, as it did not have the right combination of two key ingredients – a positive Earnings ESP and a Zacks Rank #3 (Hold) or better.

However, it would not be unjustified this time to blame industry-wide headwinds, as the company did not have to pay significantly for its wrongdoings and related settlements. A new set of dampeners – dreary consumer and corporate activities, soft trading volumes and sluggish mortgage banking – dragged earnings this time around. Moreover, fundamental pressure from a low interest rate and sluggish loan growth made matters worse.

Shares of JPMorgan lost more than 3.5% in the pre-trading session, indicating that the market is upset with the results. The price reaction during the trading session will give a better sense about the extent of disappointment among investors.      

While its cost containment efforts were reflected in the non-interest expenses, pressure on the top line and higher-than-expected provision dominated. Most noticeably, all business segments, except Corporate/Private Equity, witnessed decline in net income from the year-ago quarter.  

However, consumer deposits and card sales volume was above the industry average. Moreover, Business Banking originations witnessed a 22% improvement. Though Corporate & Investment Bank CIB earned 24% lower than the prior-year quarter, it maintained its #1 rank in Global Investment Banking fees. It also ranked #1 in global debt, equity and syndicated loans.

Quarter in Detail

Managed net revenue of $23.9 billion in the quarter was down 8% from the year-ago quarter. The top line also compared unfavorably with the Zacks Consensus Estimate of $24.6 billion.

Managed non-interest revenues were down 12% from the year-ago quarter at $13.0 billion. Net interest income also fell 2% year over year to $10.9 billion, primarily reflecting the impact of lower loan yields and lower trading and investment securities balances. Non-interest expense was $14.6 billion, down 5% from the year-ago quarter. Lower performance-based compensation in CIB and lower mortgage production and servicing expenses primarily drove this improvement.

The provision for credit losses was $850 million, up 38% from the year-ago quarter. Total consumer provision for credit losses was $807 million compared with $545 million in the year-ago quarter. This reflects lower estimated losses in the mortgage and credit card portfolios.  

Credit Quality

JPMorgan's credit quality improved during the quarter. As of Mar 31, 2014, nonperforming assets were $9.5 billion, down 19% from $11.7 billion a year ago. Consumer net charge-offs decreased 24% year over year to $1.3 billion. As a result, the consumer net charge-off rate improved to 1.42% from 1.92% a year ago.

Capital Position

JPMorgan maintained a strong capital position with Tier 1 capital ratio of 12.1% as of Mar 31, 2014, compared with 11.9% as of Dec 31, 2013. Tier 1 common capital ratio was 10.9% as of Mar 31, 2014, compared with 10.7% as of Dec 31, 2013.

Book value per common share was $54.05 as of Mar 31, 2014 compared with $53.25 as of Dec 31, 2013 and $52.02 as of Mar 31, 2013. Tangible book value per common share came in at $41.73 as of Mar 31, 2014 compared with $40.81 as of Dec 31, 2013 and $39.54 as of Mar 31, 2013.

In Our View

The banking behemoth is working hard to reduce costs and improve top line to remain profitable, but the ongoing legal issues, though lower than before, would weaken its footing in the industry to some extent.

Pressure on interest margin and the impact of a stringent regulatory environment might also mar its results going forward. However, improving retail and investment banking, credit trends and business banking originations are expected to support the bottom line.

In the banking sector, JPMorgan has kicked off the first-quarter earnings season with Wells Fargo & Co. WFC. Therefore, the release is going to be a significant indicator of fundamental performance by the key banking sector.  
 
Among other Wall Street big banks, Citigroup, Inc. C is scheduled to release its first quarter results on Apr 14 and Bank of America Corp. BAC will report on Apr 16.