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Weakness? Not at JPMorgan

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Proving pessimists wrong, JPMorgan Chase & Company (JPM - Free Report) came out with a positive earnings surprise of about 16% for the fourth quarter. The banking giant concluded the year of its 'London Whale' trading fiasco on a strong note with fourth quarter earnings per share of $1.39, which surpassed the Zacks Consensus Estimate of $1.20 and the year-ago earnings of 90 cents.

This represents the fourth straight quarter with a positive earnings surprise for JPMorgan.

Despite the impact of a number of legal and regulatory issues as well as fundamental pressures like low interest rate and weak loan demand, JPMorgan’s fourth quarter earnings beat reflects the underlying strength in its business segments and signals the good health of the sector.

Additionally, favorable macroeconomic elements, including strong capital market activities and accelerating housing market recovery, helped JPMorgan overcome its difficulties to a great extent.

JPMorgan’s earnings per share for the reported quarter comprised certain significant nonrecurring items. These include a detriment of 14 cents for mortgage-related matters in Mortgage Banking, a loss of 9 cents from debit valuation adjustments (DVA) in Corporate & Investment Bank, a benefit of 16 cents from tax adjustments in Corporate and an advantage from reduced mortgage loan loss reserves in Real Estate Portfolios of 11 cents. All these are after-tax numbers. Excluding these items, JPMorgan earned $1.35 per share.
Results for the reported quarter primarily benefited from improved revenues and a slowdown in provision for credit losses, marginally offset by higher noninterest expenses. 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 with more than two-fold net income growth over the prior and prior-year quarter. All the other segments also showed decent improvement. With a healthy market share, Corporate & Investment Bank maintained its #1 rank in Global Investment Banking fees.

For full-year 2012, earnings were $5.20 per share, up 16% year over year. This was also 4% ahead of the Zacks Consensus Estimate of $5.01.
Quarter in Detail

Managed net revenue of $24.4 billion in the quarter was up 10% from the year-ago quarter. The figure also compared favorably with the Zacks Consensus Estimate of $24.3 billion.

For the full year, managed net revenue came in at $99.9 billion, almost in line with the year-ago revenues. This compares favorably with the Zacks Consensus Estimate of $97.9 billion.

Managed non-interest revenue for the quarter increased 32% from the year-ago period to $13.1 billion. The increase was backed by higher mortgage fees and related income, higher principal transactions and an increase in investment banking fees.

Net interest income fell 8% from the year-ago quarter to $11.3 billion, primarily reflecting the impact of low interest rates. Non-interest expense was $16.0 billion, up 10% from the year-ago quarter. Non-interest expense included $900 million pre-tax expense for mortgage-related matters.
Managed provision for credit losses decreased 70% from the year-ago quarter to $656 million. Total consumer provision for credit losses was $1.1 billion, down $745 million from the year-ago quarter. This reflects improved delinquency trends in the mortgage portfolio as well as reduced estimated losses, primarily in the home equity portfolio.
Credit Quality

JPMorgan’s credit quality improved during the quarter. As of Dec 31, 2012, nonperforming assets were $11.7 billion, down 6% from $12.5 billion in the prior quarter. Consumer net charge-offs decreased 31% year over year to $1.8 billion. As a result, the consumer net charge-off rate improved to 1.99% from 2.74% a year ago.

Capital Position

JPMorgan maintained a strong capital position with Basel I Tier 1 common ratio of 11.0% as of Dec 31, 2012, up from 10.4% as of Sep 30, 2012 and 10.1% as of Dec 31, 2011. The estimated Basel III Tier 1 common ratio was 8.7% as of Dec 31, 2012, up from 8.4% as of Sep 30, 2012.

Book value per common share was $51.27 as of Dec 31, 2012, compared with $50.17 as of Sep 30, 2012 and $46.59 as of Dec 31, 2011.

In Our View

In addition to its fundamental strength, the positive developments of the sector and gradually improving macroeconomic elements helped JPMorgan keep up with 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 to some extent going forward. However, gradually improving retail and investment banking performance, and better 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, the ongoing recovery in the capital markets will continue to support JPMorgan’s results in the upcoming quarters.

JPMorgan shares currently retain a Zacks Rank #3 (Hold). 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 the second among the banking big shots to report fourth-quarter earnings. Therefore, the release is going to be a significant indicator of performance in the key banking sector. Wells Fargo & Company (WFC - Free Report) was the first mega bank to kick-start the fourth-quarter banking results on Jan 11.

Among other Wall Street majors, Goldman Sachs Group Inc. (GS - Free Report) has released its earnings today. Citigroup, Inc. (C - Free Report) and Bank of America Corporation (BAC - Free Report) will report on Jan 17 and Morgan Stanley (MS - Free Report) on Jan 18.

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