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JPMorgan Chase & Company (JPM - Analyst Report) returned to its earnings story in the fourth quarter after covering its legal costs. The banking giant came out with earnings of $1.30 per share, beating the Zacks Consensus Estimate of $1.25. However, earnings deteriorated from the year-ago number of $1.39.

The strength of JPMorgan’s legal reserves made a return to positive earnings surprise possible. The company remained in good shape despite resolving the legal issues related to Global RMBS, Gibbs & Bruns and Madoff.   

Shares of JPMorgan gained around 1% in the pre-market session, indicating that the market has taken this release positively. The price reaction during the trading session will give a better idea about whether JPMorgan has been able to meet expectations.       

In addition to dealing with legal expenses, the company well evaded the fundamental pressure from a low interest rate and sluggish loan growth thanks to solid performance by its client franchises.   

Earnings per share for the quarter included 21 cents gain on sale of Visa shares, 8 cents gain on sale of One Chase Manhattan Plaza, 27 cents legal expenses (including Madoff settlements), 20 cents benefit from reduced reserves in Real Estate Portfolios & Card Services, and 32 cents detriment related to funding valuation adjustments (FVA) and debit valuation adjustments (DVA). Excluding these items, JPMorgan would have earned $1.40 per share, surpassing of the Zacks Consensus Estimate with ease.  
 
Lower-than-expected non-interest expenses and almost steady top line more than offset the higher-than-expected provision. However, the company witnessed improved transactions and gained market share in Banking and Markets during the quarter. Client investment assets were at impressive levels and growth in Consumer deposits and Credit Card sales volumes continued.  

Most noticeably, though the Corporate & Investment Bank segment earned 57% lower than the prior-year quarter, it maintained its #1 rank in Global Investment Banking fees. It also ranked #1 in global debt, equity, syndicated loans and U.S. announced M&A. All the other segments showed decent improvement.

For the full year, earnings per share came in at $4.35 compared with $5.20 in the previous year.
    
Quarter in Detail

Managed net revenue of $24.1 billion in the quarter was down 1% from the year-ago quarter. The top line also compared unfavorably with the Zacks Consensus Estimate of $25.0 billion.

Managed non-interest revenues were flat with the year-ago quarter at $13.0 billion. However, net interest income fell 2% year over year to $11.1 billion, primarily reflecting the impact of lower loan yields and lower trading and investment securities balances. Non-interest expense was $15.6 billion, down 3% from the year-ago quarter. Lower servicing expense primarily drove this improvement.

The provision for credit losses was $104 million, down 84% from the year-ago quarter. Total consumer provision for credit losses was $65 million compared to $1.1 billion in the year-ago quarter. This reflects improved delinquency trends, reduction in the allowance for loan losses and lower estimated losses in the mortgage and credit card portfolios.

Credit Quality

JPMorgan’s credit quality improved during the quarter. As of Dec 31, 2013, nonperforming assets were $9.7 billion, down 18% from $11.9 billion a year ago. Consumer net charge-offs decreased 28% year over year to $1.3 billion. As a result, the consumer net charge-off rate improved to 1.44% from 1.99% a year ago.

Capital Position

JPMorgan maintained a strong capital position with Basel I Tier 1 common ratio of 10.7% as of Dec 31, 2013, compared with 10.5% as of Sep 30, 2013. The estimated Basel III Tier 1 common ratio was 9.5% as of Dec 31, 2013, compared with 9.3% as of Sep 30, 2013.

Book value per common share was $53.25 as of Dec 31, 2013 compared with $52.01 as of Sep 30, 2013 and $51.27 as of Dec 31, 2012. Tangible book value per common share came in at $40.81 as of Dec 31, 2013 compared with $39.51 as of Sep 30, 2013 and $38.75 as of Dec 31, 2012.

In Our View

Legal hassles seem to have become part of JPMorgan, so it will have to set aside funds as reserves to address these and maintain profitability. Though the banking behemoth is working hard to reduce costs and improve top line to remain profitable, the ongoing legal settlements 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, rapidly improving retail and investment banking, and continued improvement in credit trends are expected to support the bottom line.

Moreover, trading revenues have been showing strength riding on the popularity of financial instruments that are not interest rate sensitive. Persistently low interest rate environment will continue to enhance trading activities, which should strongly support the top line going forward.

Among the banking big shots, JPMorgan, with exposure in almost all banking businesses, has kicked off the fourth quarter earnings season with Wells Fargo & Company (WFC - Analyst Report). Therefore, the release is going to be a significant indicator of fundamental performance by the key banking sector. However, legal expenses that JPMorgan has been incurring are not common for all industry players.  
 
Among other Wall Street big banks, Bank of America Corp. (BAC - Analyst Report) is scheduled to release its fourth quarter results on Jan 15 and Citigroup, Inc. (C - Analyst Report) will report on Jan 16.

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