JPMorgan Q1 profit up 67 percent; can it be repeated?
NEW YORK |
(Reuters) - JPMorgan Chase & Co drastically cut the amount of money set aside for bad loans, allowing it to boost first-quarter profit by two-thirds but prompting questions about whether the results can be repeated.
The bank's book of consumer loans shrank by 10 percent in the quarter, and loans to corporate customers did not grow enough to make up for it. The No. 2 U.S. bank also took $1.75 billion of charges linked to collecting payments on bad mortgages and foreclosures, and said an upcoming settlement with regulators over mortgage servicing abuses could force it to hire as many 3,000 people.
The quarterly results were the first from a major Wall Street bank, and although they beat expectations, they raised investor concerns about lending profits. Bank shares broadly edged lower.
Analysts said a good deal of JPMorgan's ability to grow in the future will depend on growth in the global economy, which will trigger more demand for loans.
"Obviously, JPMorgan can't count on gains from (setting aside less money) in the future. If the bank can't get their loan book growing in a significant way, they face a number of headwinds," said Sean Egan, managing director at Egan-Jones Ratings.
Economic growth could help spur demand for loans, stock and bond underwriting, and other services, and an acquisition outside the United States could help generate higher profit, too, Egan added.
Bond trading profits, though, were higher than some analysts had expected, which helped lift Goldman Sachs Group Inc shares 1.1 percent. Goldman is due to report earnings next Tuesday.
JPMorgan earned $5.56 billion, or $1.28 a share, in the first quarter, up from $3.33 billion, or 74 cents a share, a year earlier. Wall Street analysts, on average, had expected $1.16 per share, according to Thomson Reuters I/B/E/S.
The bank set aside $1.17 billion to cover bad loans, down from $7.01 billion a year earlier. The declining loan loss provision was fueled by lower credit losses for many types of loans, including credit cards.
Credit improvement was a key factor in regulators allowing JPMorgan in March to boost its dividend after stress tests.
The bank will begin paying a quarterly dividend of 25 cents per share at the end of April, up from 5 cents. It has also authorized a $15 billion share repurchase.
Chief Executive Jamie Dimon said on a conference call that investors should expect the bank to buy at least $3 billion of shares this year. The bank is authorized to buy as much as $8 billion worth in 2011.
PRE-PROVISION PROFIT OFF
Dimon is often credited with skillfully piloting his bank through the financial crisis, but many investors are now looking for signs of revenue growth.
In recent quarters, the bank has boosted profit mainly by setting aside less money to cover credit losses, rather than by generating more money from new loans.
Pre-provision profit, a measure of how much the bank earns before setting aside money for credit losses, fell 20 percent to $9.23 billion in the first quarter.
Loans on the bank's books fell 4 percent to $686 billion, indicating demand for loans is tepid compared with how quickly existing loans are being repaid.
"The key is loan growth," said Adrian Cronje, chief investment officer at wealth management firm Balentine in Atlanta.
"That's what will ultimately turn this recovery into a durable expansion, but it seems like that's not yet happening," he added.
The bank is making more loans to corporate customers, but the terms of those loans are easier than they have been in prior quarters, Dimon said.
JPMorgan's investment banking profit fell 4 percent to $2.37 billion. Merger advisory and debt underwriting revenue jumped, while trading revenue fell, as did stock underwriting.
One continuing millstone for JPMorgan is its residential mortgage book, where it took a $1.1 billion charge before taxes to account for the higher costs of collecting payments on mortgages, and a $650 million charge before taxes for foreclosure-related matters. Those costs will not be recurring, Chief Financial Officer Doug Braunstein said on a conference call with reporters.
In a statement, Dimon said the bank is suffering from "extraordinarily high losses" from mortgage-related issues.
CFO Braunstein said in a conference call with reporters that the bank would have to spend $1.1 billion to hire the 2,000 to 3,000 people it will need to comply with the mortgage servicing settlement, and the regulators may impose additional fees and penalties.
CEO Dimon added, "I think a good global settlement would be good for everybody ... Keeping this mess going on is not a good thing for anybody."
(Reporting by Clare Baldwin; additional reporting by Dominic Lau in London, Joe Rauch in Charlotte, N.C., and Maria Aspan and Dan Wilchins in New York; editing by John Wallace)
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