JP Morgan (JPM) kicked off the first quarter earnings season for major financial stocks, and it reaffirmed our opinion that it is crème of the crop. Net income jumped 57% in the quarter to $3.3 billion or $.74 per share, which compares favorably to analysts’ estimates of $.64 per share and profits from the quarter a year ago of $.40 per share. Trading revenue was more robust than most analysts predicted, and overall revenue climbed 4.6% to $28.2B versus expectations of $26.5B. Clearly, JP Morgan continues to benefit from exceptionally low interest rates and a general improvement in the US economy.
Investment banking operations were easily the most impressive segment of the massive operation which also services commercial and retail banking customers. Indeed, $2.47B or nearly three-quarters of profits came from the investment banking side (compared to just $865 million a year ago), as fixed-income trading was especially strong in the past quarter. JP Morgan has long been hampered by weakness in their large credit card division, but that business showed improving trends as it reported 5.62% of those loans were behind more than 30 days which is far better than the 6.28% seen just a quarter ago. The bank pared losses in that division to only $303 million compared to $547 million a year ago and management advised that it may be profitable again by the end of the year as long as the economic rebound continues.
Still some credit trends are not as bullish as home-loans continue to have a higher rate of delinquency even among those borrowers with good credit. They noted that 64,000 modifications of mortgages took place during the quarter bringing the total over the last five quarters to over 750,000. Despite continued headwinds in home loans, otherwise improved credit trends allowed the bank to draw down on loan loss reserves to $7 billion; a decline of 18% from a year ago and 4% sequentially. Chairman and CEO Jamie Dimon did not wave the all clear sign, but he did say that he expected JPM to continue to benefit from the economic recovery. “There have been clear and broad-based improvements in underlying trends. We believe these improvements will continue and are hopeful they will gather momentum, resulting in a strong recovery.”
The results for JP Morgan’s last quarter were influenced by two key factors: stronger trading revenue and a reduction in provisions set aside for losses boosting other divisions. JPM management, which we believe is among the banking industry’s best, is slowly becoming more aggressive as they reduce reserves and even discussed hiring as many as 9,000 employees. We think the one thing missing from this report was commitment to raise the dividend which was hacked down to nearly 87% to 5 cents per quarter last year. The firm is in much better standing than at that time and Tier 1 capital ratio has lifted to 11.5%. In addition, JPM’s earnings have rebounded nicely and appear to be able to easily accommodate a doubling or even tripling with little trouble.
Investors are cheering the quarter’s results and the stock is about 3% higher in heavy morning trading action, so perhaps a dividend raise would have been overshadowed in the excitement and may be more purposeful at a later date. With all the speculation over financial reform swirling, JP Morgan may be wise to wait and see the new rules before raising the yield. As is plainly obvious, investment banking (heavily influenced by the prop. trading desk) accounted for about 55 cents of per share profit last quarter, so any reform that threatens this income stream would pressure the bank’s bottom-line. Jamie Dimon and his team have shown to be pragmatic in their leadership of the bank thus far, and we are confident they will raise the dividend when they feel the time is right.
At Ockham, we have reiterated our Fairly Valued or neutral stance on JPM as of this report. We view the stock positively and like their competitive position, but it has run up rapidly over the last year and does not make a great value stock at this time. Also, we see the much lower than historically normal dividend as a negative factor in our analysis, and a return to more normal levels would be greeted positively by our methodology.