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Maintaining its track record, JPMorgan Chase & Co. (JPM - Analyst Report) came out with a positive earnings surprise of about 16% for the first quarter. The banking giant reported record earnings per share of $1.59, surpassing the Zacks Consensus Estimate of $1.37 and the year-ago earnings of $1.19. This represents the fifth straight quarter with a positive earnings surprise for JPMorgan.

Our proven model predicted that JPMorgan will beat earnings as it had the right combination of two key ingredients – the earnings ESP (Read: Zacks Earnings ESP: A Better Method) of +2.92% and Zacks Rank #2 (Buy).

Despite the impact of a number of legal and regulatory issues as well as fundamental pressures like low interest rate and sluggish loan growth, JPMorgan’s first quarter earnings beat reflects the underlying strength in its business segments and solid performance by its client franchises.

Additionally, favorable macroeconomic elements, including strong capital market activities, rising new home purchases and falling unemployment, helped JPMorgan overcome its difficulties to a great extent.

JPMorgan’s earnings per share for the reported quarter comprised a couple of significant nonrecurring items. These include benefits of 10 cents from lower mortgage loan loss reserves in Real Estate Portfolios and 8 cents from reduced credit card loan loss reserves. Excluding these after-tax items, JPMorgan earned $1.41 per share.
 
The reported results primarily benefited from reduced noninterest expenses and provision for credit losses, partially offset by lower-than-expected net revenue. Performances by the company’s wholesale loan portfolios and credit card portfolio were impressive as credit conditions remained favorable.  

Most noticeably, the Corporate/Private Equity segment showed solid improvement during the quarter, reporting an income compared with a huge loss a year ago. All the other segments also showed decent improvement but for Consumer & Community Banking and Commercial Banking.

The Corporate & Investment Bank’s net income jumped significantly and with a healthy market share. The division maintained its #1 rank in Global Investment Banking fees. It also ranked #1 in global debt and equity, syndicated loans, and announced M&A.
    
Quarter in Detail

Managed net revenue of $25.8 billion in the quarter was up 3% from the year-ago quarter. The figure also compared favorably with the Zacks Consensus Estimate of $25.3 billion.

Managed non-interest revenue decreased by $167 million from the year-ago quarter to $14.8 billion. Net interest income fell 6% year over year to $11.1 billion, primarily reflecting the impact of low interest rates as well as lower loan yields due to competitive pressures and portfolio run-off.

Non-interest expense was $15.4 billion, down 16% from the year-ago quarter. The year-ago number included $2.5 billion of additional litigation reserves.
 
Managed provision for credit losses decreased 15% from the year-ago quarter to $617 million. Total consumer provision for credit losses was $545 million, down $92 million from the year-ago quarter. This reflects improved delinquency trends and reduced estimated losses in the mortgage and credit card portfolios.

Credit Quality

JPMorgan’s credit quality improved during the quarter. As of Mar 31, 2013, nonperforming assets were $11.6 billion, down 3% from $12.0 billion a year ago. Consumer net charge-offs decreased 29% year over year to $1.7 billion. As a result, the consumer net charge-off rate improved to 1.92% from 2.60% a year ago.

Capital Position

JPMorgan maintained a strong capital position with Basel I Tier 1 common ratio of 10.2% as of Mar 31, 2013. This includes the impact of the Basel 2.5 rules. The estimated Basel III Tier 1 common ratio was 8.9% as of the same date, up from 8.7% as of Dec 31, 2012.

Book value per common share was $52.02 as of Mar 31, 2013, compared with $51.27 as of Dec 31, 2012 and $47.48 as of Mar 31, 2012.

After the release of stress test 2013 results in March, the Federal Reserve approved JPMorgan’s proposed capital plan. But the banking giant will have to resubmit its plan by the end of third quarter 2013. The Fed wants the new capital plan to address the weakness recognized in the bank’s planning process.

In Our View

In addition to its fundamental strength, the positive developments of the sector and better macroeconomic elements helped JPMorgan sustain its illustrious track record.
   
On the other hand, the banking behemoth is trying to dodge the pressure on net interest margin, low liquidity and a stringent regulatory environment, which might mar its results going forward. However, rapidly improving retail and investment banking performance, and better credit trends in its credit card business are expected to provide some relief.

Moreover, given the prevailing low interest rate environment, there is a surge in demand for financial instruments that are not interest rate sensitive and offer better returns. As a result, non-interest revenue sources, primarily trading revenue, should be a strong support to the top line going forward.

Though there are concerns related to the impact of legal issues and exposure to the European economy, the ongoing recovery in the capital markets will continue to support JPMorgan’s results in the upcoming quarters.

Among the banking big shots, JPMorgan, with exposure in almost all banking businesses, has kicked off the first quarter earnings with Wells Fargo & Company (WFC - Analyst Report). Therefore, the release is going to be a significant indicator of performance in the key banking sector.
 
Among other Wall Street big shots, Citigroup, Inc. (C - Analyst Report) is scheduled to release its first quarter results on Apr 15 and Goldman Sachs Group Inc. (GS - Analyst Report) will report on Apr 16.

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