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Maintaining its track record, JPMorgan Chase & Company (JPM - Analyst Report) reported third quarter earnings per share of $1.40, way ahead of the Zacks Consensus Estimate of $1.21. This also compares favorably with $1.02 earned in the prior-year quarter.

Despite the impact of a number of legal and regulatory issues as well as fundamental pressures like low interest rate and sluggish loan demand, JPMorgan’s almost 16% earnings surprise signals good going for the sector. A marked improvement in capital market activity and healthy mortgage business, which helped JPMorgan overcome its difficulties to a great extent, should also lift the results of other mega banks during the quarter.

JPMorgan’s earnings per share for the reported quarter comprised certain significant nonrecurring items. These include a benefit of 14 cents from reduced mortgage loan loss reserves in real estate portfolios, a benefit of 14 cents from extinguishment gains on redeemed trust preferred capital debt securities in Corporate, detriment of 13 cents due to incremental charge-offs and expense for additional litigation reserves in Corporate of 11 cents. All these are after-tax numbers. Excluding these items, JPMorgan earned $1.36 per share.
 
Results for the reported quarter primarily benefited from improved revenue and slowdown in provision for credit losses, marginally offset by still high noninterest expenses. The earnings uptrend was a result of all business segments performing well.

Most noticeably, the Corporate/Private Equity segment finally turned profitable after incurring losses for several quarters. Investment banking results witnessed marginal deterioration from the prior-year quarter due to lower revenue and higher noninterest expenses.

However, the results were much worse than the prior quarter despite a benefit from the provision for credit losses. In Fixed Income results were favourable in Investment Bank during the quarter. With a healthy market share, the segment maintained its #1 rank in Global Investment Banking fees.

Retail Financial Services and Commercial Banking divisions demonstrated good underlying performances, with improved revenue and earnings. Also, with positive credit trends and an expansion in credit card sales volume, the performance of the Card business was impressive. Treasury & Securities Services reported higher deposit balances during the quarter and performed better than the prior-year quarter.
   
Quarter in Detail

Managed net revenue of $25.9 billion in the quarter was up 6% from the year-ago quarter. The figure also compares favorably with the Zacks Consensus Estimate of $24.6 billion.

Managed non-interest revenue increased 18% from the year-ago period to $14.7 billion. The increase was due to higher mortgage fees and related income, higher principal transactions and higher investment banking fees. Net interest income fell 6% from the year-ago quarter to $11.2 billion, primarily reflecting the impact of low interest rates. Non-interest expense was $15.4 billion, down 1% from the year-ago quarter.
 
Managed provision for credit losses decreased 26% from the year-ago quarter to $1.8 billion. Total consumer provision for credit losses was $1.9 billion, down $432 million from the year-ago quarter. This reflects improved delinquency trends across mortgage and credit card portfolios as well as reduced estimated losses.
 
Credit Quality

JPMorgan’s credit quality deteriorated during the quarter. As of September 30, 2012, nonperforming assets were $12.5 billion, up 10% from $11.4 billion in the prior quarter and and flat compared with the prior-year quarter. Consumer net charge-offs increased 4% to $2.8 billion. As a result, the consumer net charge-off rate deteriorated to 3.10% from 2.84% a year ago.

Capital Position

JPMorgan maintained a strong capital position with Basel I Tier 1 common ratio of 10.4% as of September 30, 2012, up from 9.9% as of September 30, 2011. The estimated Basel III Tier 1 common ratio was approximately 8.4% as of September 30, 2012, up from 7.9% as of June 30, 2012.

Book value per common share was $50.17 as of September 30, 2012, compared with $48.40 as of June 30, 2012 and $45.93 as of September 30, 2011.

Our Viewpoint

The positive developments of the sector and gradually improving macroeconomic elements helped the banking behemoth l to keep up with its illustrious track record.

On the fundamental side, JPMorgan is trying to dodge the pressure on net interest margin, low liquidity and a stringent regulatory environment, which might mar its results to some extent going forward. However, gradually improving retail banking performance and steady credit trends in its credit card business are expected to provide some perks.

Though there are concerns related to the impact of legal issues and its exposure to the European economy, equity-centric activities in the U.S. are expected to support JPMorgan’s results in the upcoming quarters with continued recovery in the capital markets.

From a risk perspective, as JPMorgan cleared the most difficult stress test, it is for sure that the company will be able to withstand another financial crisis.
 
JPMorgan shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the company’s business model and fundamentals, we also have a long-term Neutral recommendation on the stock.

JPMorgan, with exposure in almost all banking businesses, is one of the first two important bankers to kick start the third quarter results. The release should be a significant indicator of performance in the key banking sector. Wells Fargo & Company (WFC - Analyst Report) is the other bank that is scheduled to release its earnings today.

Close on the heels of JPMorgan and Wells Fargo, the other major banks gearing to release their earnings are Citigroup Inc. (C - Analyst Report) on October 15, Goldman Sachs Group Inc. (GS - Analyst Report) on October 16, Bank of America Corporation (BAC - Analyst Report) on October 17 and Morgan Stanley (MS - Analyst Report) on October 18.

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