J.P. Morgan’s Dimon Warns Economy Likely to Worsen
The New York firm, which kicks off earnings season for big U.S. banks, logs stronger-than-expected results
By EMILY GLAZER and PETER RUDEGEAIR
Updated Jan. 14, 2016 10:44 a.m. ET
J.P. Morgan Chase & Co. said cost-cutting helped its fourth-quarter profit beat expectations, but Chairman and CEO James Dimon said the U.S. economy is likely to worsen after years of growth.
The nation’s largest bank by assets reported its second consecutive year of record annual earnings, but that mainly came on the back of lower expenses as revenue for the year fell 2%.
Fourth-quarter profit rose about 10% to $5.43 billion, or $1.32 a share. Analysts polled by Thomson Reuters had expected earnings of $1.25 a share. Quarterly revenue rose slightly to $23.75 billion and also beat expectations.
For the year, J.P. Morgan earned $24.44 billion, exceeding 2014 record earnings of $21.76 billion. The result rivaled Citigroup Inc.’s pre-crisis earnings of $24.59 billion in 2005.
Shares rose 2.1% in morning trading.
On a call with analysts, Mr. Dimon and J.P. Morgan finance chiefMarianne Lake fielded questions on whether the U.S. economy has more strong days ahead.
“It’s as good as it’s ever been,” Mr. Dimon said on the call. “Obviously it’s going to get a little bit worse.”
Mr. Dimon said he wasn’t ready to forecast a recession though, and that the economy “still looks okay.” He cited 2% to 2.5% growth for the last five years, roughly 5 million added jobs, and boosts in household formation, car sales and wages.
But he added that the market is adjusting to concerns about China’s economy and falls in commodity prices. “Hopefully this will all settle down and is not the beginning of something really bad,” he added.
While J.P. Morgan, the largest U.S. bank by assets, has defended its global size and scale, the bank has also taken steps to shrink its balance sheet to avoid the toughest capital requirements that the Federal Reserve applies to the largest institutions. Total assets at the bank fell 3% to $2.35 trillion between the end of September and the end of December, and the bank said it expected to face a lower capital surcharge of 3.5% partially as a result.
“The balance sheet was down in part purposefully and a little bit because of market conditions at the year end,” Ms. Lake said on a call with media. She added that the balance sheet could grow as the bank aims to boost overall deposits and loans.
The company’s business lines experienced mixed results. Overall profit at J.P. Morgan’s corporate and investment bank rose 80% to $1.75 billion from $972 million in the same period last year. But J.P. Morgan’s commercial bank earned $550 million, a 21% decrease from the $693 million it earned in the year-ago quarter, and the bank’s asset management unit reported profit of $507 million, down from $540 million in the fourth quarter of 2014.
Within the investment bank, many main businesses recorded declines in revenue that were made up for by lower legal fees and an 8% drop in compensation expenses. Investment-banking fees fell 15% to $ 1.54 billion as a 43% jump in merger advisory fees was outweighed by a 43% fall in the larger business of underwriting bond deals.
J.P. Morgan’s trading revenue decreased about 4% to $3.64 billion from $3.8 billion in the fourth quarter of 2014. Compared with the third quarter, trading was down 16%, about where corporate and investment bank head Daniel Pinto predicted it would be in November.
Fixed-income trading revenue edged down 3% to $2.57 billion, and equity trading declined 7% to $1.06 billion. Backing out revenue declines related to businesses that the bank had exited in the previous year, the bank said fixed-income trading was only down 1% and equity trading was flat.
Mr. Dimon said the bank is tracking the China markets closely given the volatility, but it hasn’t changed the firm’s long-term plan.
Within the consumer bank, profit was $2.41 billion, slightly higher than the $2.18 billion in the fourth quarter a year ago. J.P. Morgan extended $22.5 billion in mortgages in the quarter, a decrease of 2% from the $23 billion the bank extended in the fourth quarter a year ago. Profits in its mortgage division, one of the largest in the U.S. by volume, were $266 million, down 21% from the $338 million it reported in the year-earlier period.
Costs decreased about 7%, to $14.26 billion in the quarter from $15.41 billion a year earlier, an effort the bank continues to drill down on.
Legal costs totaled $644 million in the fourth quarter, compared with $990 million in the same period a year ago and $1.3 billion in the third quarter.
J.P. Morgan also built up its reserve for bad loans, a move none of the big national banks has done for the past six years. It added $136 million to its reserves in the quarter, or $187 million if provisions for lending-related commitments are included. The move was driven in large part by worsening credit conditions among the bank’s energy-industry borrowers, which prompted J.P. Morgan to add $124 million in reserves related to its oil and gas loan portfolio.
For the past six years, the banks have been releasing reserves, writing off bad loans as uncollectible, thus freeing up the reserves associated with them, to a greater extent than they have added new provisions for soured loans. In comparison, J.P. Morgan, for instance, had released $396 million in reserves in the third quarter and $362 million in the year-ago fourth quarter.
The bank lost $1.06 billion to loan defaults in the most recent quarter, or 0.52% of its overall portfolio, compared with a 0.65% charge-off rate in the third quarter.
Ms. Lake said the bank continues to watch the energy sector as oil hovers around $30 a barrel and expects additional “incremental reserves” in the next couple of quarters. She added the bank tracks energy firms by name and other conditions including hedging, cash flows and security levels.
Return on equity, a measure of J.P. Morgan’s profitability, was 9% in the fourth quarter, unchanged from the same period a year ago. This week’s announcement that MetLife Inc. will divest a chunk of one of its main business could re-insert J.P. Morgan into the debate about whether it might be better for shareholders if global banks broke themselves up into smaller, more manageable units. Mr. Dimon said MetLife’s decision has “no effect on us whatsoever; we’re a different business.”
Shares in J.P. Morgan hit an all-time record above $70 in July but have fallen 19% since then through Wednesday’s close. Since the beginning of 2016, they are down 13% compared with an 11% decrease in the KBW Nasdaq index of bank stocks. Big-bank stocks have been hit hard this year as jitters about a China slowdown and oil-company defaults pressure the earnings outlook. |
