JP Morgan Beats Estimates

Highlights include JPMorgan Chase & Co. ([url=http://www.zacks.com/research/report.php?t=jpm]JPM[/url]), Goldman Sachs Group, Inc. ([url=http://www.zacks.com/research/report.php?t=gs]GS[/url]), Capital One Financial Corp. ([url=http://www.zacks.com/research/report.php?t=cof]COF[/url]) and Wells Fargo & Co. ([url=http://www.zacks.com/research/report.php?t=wfc]WFC[/url]).

JPMorgan Chase & Co. ([url=http://www.zacks.com/research/report.php?t=jpm]JPM[/url]) today reported its 1Q09 net income at $2.1 billion; down from year-ago quarter net income of $2.4 billion. Earnings per share were $0.40, ahead of consensus estimates of $0.32 a share.

The group had very strong results in the Fixed Income Markets, with revenue at a record $4.9 billion, compared with $466 million in the prior-year quarter, mirroring what we saw in the Goldman Sachs’ ([url=http://www.zacks.com/research/report.php?t=gs]GS[/url]) results. Both the companies made handsome profits in credit, commodities and currency trading. Obviously these banks are benefiting from the tremendous efforts by the Federal Reserve to free up the credit markets. JP Morgan also had the advantage of increased market share from its purchase of Bear Stearns.

At the same time, the company had extremely high credit costs, especially in the credit card services and the retail financial services. The provision for credit losses was $10.1 billion, almost double from the prior-year quarter. The steep rise in provision was mainly reflected in higher losses/expected losses related to credit card loans and home lending.

JP Morgan's card division posted a loss of $547 million compared with a profit of $609 million last year. We have seen that the credit card defaults are currently at their record highs and are expected to increase further. Capital One ([url=http://www.zacks.com/research/report.php?t=cof]COF[/url]) yesterday reported that its first quarter credit card charge-offs exceeded 9%.

Asset management, treasury and securities services, and the corporate lending unit also had weaker results. But the company benefited from growth in deposits, mainly due to Wamu’s acquisition. Retail banking had a growth of 62% in deposits by 62% and checking accounts grew by 126%. The company also benefited from stronger mortgage originations (as we also saw in case of Wells Fargo's [[url=http://www.zacks.com/research/report.php?t=wfc]WFC[/url]] pre-announcement).

As of March 31, 2009, the firm had a Tier 1 Capital ratio of 11.3%, or 9.2% excluding TARP capital. Tangible common equity to risk-weighted assets ratio was also strong at 7.2%. During the conference call, Mr. Dimon said that the company would like to pay back the TARP funds as soon as it receives guidance from the Government and further, in view of its strong capital position, it does not need to raise capital to repay TARP money.

Mr. Dimon also said that the company does not intend to participate in PPIP (Public-Private Investment Program), though he thinks that if PPIP is properly executed, it could be good for the system. He also clarified that the company’s results did not benefit from accounting rule changes.

The results basically were in-line with the trend we have seen in the banks’ results/preannouncements so far. The banks are befiting from the various efforts programs launched by the Treasury and the Federal Reserve to reduce the banks’ funding costs to near zero levels, to free up the credit markets, and to bring down the mortgage rates (resulting in a rush in refinancing). But as the economy continues to be in recession, unemployment continues to rise and the housing and Commercial Real Estate (CRE) prices continue to decline, the losses continue to grow in the credit card, housing and CRE portfolios.