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Earnings Torpedo Sinks JPMorgan Chase
04/14/2011 2:53 pm EST
So how did investors react to getting their hopes and fears confirmed by JPMorgan Chase’s (JPM) first-quarter earnings, reported before the market open in New York on April 13?
Not all that well, it turns out. The stock was down nine cents a share the day of the earnings announcement, and is down almost 2.3% for the day as I post this on April 14.
The bank, the second largest in the United States by assets, reported earnings of $1.28 a share for the first quarter. That was an increase of 73% from the first quarter of 2010, and 12 cents a share better than Wall Street had projected.
Wall Street had been expecting an increase in earnings on lower levels of reserves against bad debt, and that’s exactly what it got on the bottom line.
On the other hand, revenue fell 8.5% from the first quarter of 2010, to $25.79 billion. That was slightly above the $25.27 billion in revenue projected by Wall Street analysts. Wall Street had been expecting a drop in revenue on weakness in the investment banking and trading units.
Initially, if I can judge from pre-market open trading, investors seemed inclined to buy based on the earnings numbers—figuring, I suspect, that earnings will climb even more once revenue starts to grow again. But then they reconsidered, looked at the weakness in revenue, and thought about how weak the market for tradition lending remains.
The bank certainly got a big bump from reduced loan-loss reserves. For example, JPMorgan Chase reported a $2 billion pre-tax (or 29 cents a share after-tax) benefit from reduced credit card loan-loss reserves.
The credit-card operation saw delinquency rates drop to 3.57%, from 5.6% in the first quarter of 2010 and 4.1% in the fourth quarter of 2010. Balancing that to a degree, the bank also announced a 16 cents a share loss from adjustments to the cost of mortgage servicing.
Overall, the bank released approximately $7 billion in reserves against bad loans back into income.
On the revenue side, the bank saw a drop in revenue from fixed income and equity markets to $6.6 billion, from $6.9 billion in the first quarter of 2010. That was still a major increase from the $4 billion in revenue from this segment in the fourth quarter of 2010. The company’s retail banking unit showed a $208 million loss, as it continued to see higher mortgage servicing costs and foreclosure delays.
The bank reported continued strengthening of its capital position. Estimated Basel III Tier 1 common equity capital climbed to 7.3%, from 7.0% in the fourth quarter of 2010.
As of April 14, I’m leaving my target for these shares in my Jubak’s Picks portfolio at $58 a share, but I’m stretching out the time schedule from August to December 2011.
Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX ), may or may not now own positions in any stock mentioned in this column. The fund did not own shares of JPMorgan Chase as of the end of January. For a full list of the stocks in the fund as of the end of January, see the fund’s portfolio here. An updated list of the fund’s holdings through the end of March will go up this week.
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