JP Morgan reported its fourth quarter earnings results this morning, beating analyst estimates by $US0.03 with an adjusted earnings per share of $US1.40.
But this is banking, people, so that’s not the whole story.
First off, it’s important to note that one-time legal expenses knocked $US0.27 per share off JPM’s earnings per share this quarter. However, the bank was able to make up for that by selling Chase Manhattan Plaza and by selling Visa shares.
If (as Eric Holder and Preet Bharara have promised) the DOJ keeps up its deluge of lawsuits against the bank, JPM will have to keep digging for things to sell to make up for those legal fees.
That said — there were two sectors of JP Morgan’s business had a rather nasty go of it in Q4. First off, there was the bank’s mortgage banking unit, where net income was $US562 million, an increase of $US144 million, or 34%.
Sounds good, except the reason JPM was able to squeeze out that cash was because of lower expenses, and $782 million the bank set aside to provide for credit losses.
Net revenue was actually down $US1.1 billion from the prior year, to $US2.2 billion. Interest income was also down 5% to $US1 billion, and noninterest income was also down $US1 billion to $US1.1 billion “driven by lower mortgage fees and related income.”
And then there’s mortgage origination, which saw a pretax loss of “$274 million, a decrease of $US1.1 billion from the prior year, reflecting lower volumes, lower margins and higher legal expense, partially offset by lower repurchase losses.”
It’s worth noting that production expense here was also very high due to legal fees, and that the bank offset this, in part, by cutting compensation.
This is an ongoing trend we saw last quarter, as higher interest rates made consumers less interested in getting a mortgage. This quarter isn’t as bad as that one, but we’re still seeing lower volumes here and it’s impacting JPM’s business.
The second sector that got hit hard this quarter was JP Morgan’s investment banking unit. Net income was down a whopping 58%, from $US858 million last year. The bank set aside far less for credit losses — only $US19 million instead of $US445 million and revenue was down.
In fact, JP Morgan’s investment bank posted a loss on revenue.
Net revenue was $US6.0 billion compared with $US7.6 billion in the prior year. Net revenue included a $US1.5 billion loss as a result of implementing a funding valuation adjustment (“FVA”) framework for OTC derivatives and structured notes. This change reflects an industry migration towards incorporating the cost or benefit of funding into their valuation; the majority of this adjustment relates to uncollateralized derivatives. Net revenue also included a $US536 million loss from debit valuation adjustments (“DVA”) on structured notes and derivative liabilities, compared with a loss from DVA of $US567 million in the prior year. Excluding the impact of both FVA1 and DVA1, net income was $US2.1 billion, down 11% compared with the prior year, and net revenue was $US8.0 billion, down 2% compared with the prior year.
Due to regulation, banks are required to report derivative losses in new ways, and that could make balance sheets look uglier this quarter, as we see here.
Combined fixed income and equity markets were flat. Debt underwriting fees were down 19%, though equity underwriting fees were up 65% — all told fees were down 3% from to prior year to $US1.7 billion.
To cap it all off JP Morgan’s investment banks’ return on equity was a paltry 6%.