Amid concerns that management, including chief executive officer Jamie Dimon, had failed to employ the necessary oversight to prevent huge trading losses — like the $6.2 billion lost by the London Whale last year — JPMorgan Chase (NYSE:JPM) reported Friday that first-quarter profit jumped 33 percent, hitting a record and beating analysts’ estimates in two major categories: cost cuts and consumer credit quality, both of which enabled the bank reduce loan-loss reserves.
For the three-month period, first-quarter net income rose to $6.53 billion, or $1.59 per share, from $4.92 billion, or $1.19 per share, in the year-ago quarter. Analysts polled by Bloomberg had predicted a significantly lower figure, with the average consensus estimate set at $1.39 per share.
Despite the fact that total net revenue dropped 4 percent, Dimon was able to increase the bank’s profit by shrinking expenses by 16 percent. Earnings also received a boost from the decrease in late payments, which helped the consumer portion of the bank reduce its loan-loss reserve by $1.2 billion. “We saw an increase in release of reserves of about half a billion dollars more than we expected, and that also helped make the number come in favorable,” Guggenheim Securities analyst Marty Mosby told Bloomberg Television’s “Surveillance.”
JPMorgan Chase has reported record profits for the past three consecutive years, including last year after its worst trading loss ever. Even with sluggish global growth and low interest rates, which compressed profit margins on lending, JPMorgan once again reported record profits this quarter.
Earnings also received a boost from the decrease in late payments, which helped the consumer portion of the bank reduce its loan-loss reserve by $1.2 billion.
However, there were some disappointments hidden away in the results, as Atlantic Equities analyst Richard Staite told the publication. To stimulate economic growth, the United States’ central bank has kept its benchmark interest rate close to zero since December of 2008, but that policy has kept the bank’s mortgage profits slim. While lenders extended $482 billion in mortgages in the first quarter, an increase from last year’s 29 percent, JPMorgan’s mortgage-banking net income dropped 31 percent to $673 million. As profits have shrunk in this sector, the bank proposed cutting between 13,000 to 15,000 jobs from its mortgage unit earlier in this year.
In comparison, revenue at JPMorgan’s corporate and investment-bank unit, which was expanded last year, increased 9 percent to $10.1 billion.
But larger problems continue to dog the bank. Early last month, in its annual stress test, the Federal Reserve found weakness in the bank’s capital plan, and both the Fed and the Office of the Comptroller of the Currency have ordered it to strengthen risk controls. These orders will lead to more sanctions in the coming months, as Dimon told shareholders in a letter released on April 10. The bet on credit derivatives was “extremely embarrassing, opened us up to severe criticism, damaged our reputation and resulted in litigation and investigations that are still ongoing,” Dimon said in the letter. “We received regulatory orders requiring improved performance in multiple areas, including mortgage foreclosures, anti-money laundering procedures and others. Unfortunately, we expect we will have more of these.”
Investors have generally shown confidence in the bank — which emerged from the financial crisis much stronger than its peers. Since 2013 began, shares have gain approximately 12 percent on the stock chart, although shares were off as much as 0.88 percent after the results were released Friday morning.
Analysts are not as confident. Top-tier investment banks are “uninvestable at this point with a risk of spinoff from universal banks,” wrote London-based Kian Abouhossein in a research note seen by Bloomberg. As investment-banking will no longer be the main driver of return on equity, an important measure of profitability, the analyst stated that investors should avoid banks like Goldman Sachs (NYSE:GS) and Deutsche Bank (NYSE:DB) because pressure on earnings is increasing and the impact of new international banking regulations is unknown. Both banks rival JPMorgan — which was not mentioned in the report — in terms of sales and trading.