Improving Credit Card Business Chips in JP Morgan’s Earnings Beat
JP Morgan (NYSE:JPM) reported Q4 2010 net income of $4.8 billion, an increase of 47% compared to Q4 2009. For the full year 2010, net income was $17.4 billion, an increase of 48% compared to the previous year. Supporting the rise in net income was $7 billion in reserves to cover debts which were added back to earnings on better economic forecast. Its main competitors are Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and Citigroup (NYSE:C).
JP Morgan reported improvements across the board with credit cards generating 27% of JP Morgan’s net income for the quarter after losing money through 2009. The investment bank accounted for 31% and ranked #1 in global investment banking fees for the year 2010 while Mortgage Banking & Other Consumer Lending reported net income of $577 million, an increase of $311 million, or 117%, from the prior year.
Commercial banking was also strong and reported net income of $530 million for the quarter, an increase of 137% from the previous year. The increase was driven by a reduction in the provision for credit losses and higher net revenue.
Lower Provisions and Delinquencies for Cards Chipped In
Card service is the second largest profit driver for JP Morgan and constitutes about 18% of its stock value. Card services reported $1.3 billion net income for Q4 2010 compared with $306 million loss a year earlier. Notably, the 30-day delinquency rates dropped to 4.1% from 6.3% in the same quarter in 2009 and 4.6% in the third quarter. A fall in delinquency rates indicate that fewer customers fewer customers fell behind on their credit card payments in the fourth quarter. The rate of credit cards charged off as bad debt also fell to 7.8% from 9.3% the prior year and 8.9% in the previous quarter. This resulted in a release of $2 billion in reserves against credit card loans which boosted profits for JP Morgan.
A decline in provisions for potential losses and lower delinquency rates and charge offs has resulted in a improvement of operating margins for the card service division from -14% in 2009 to an estimated 14% in 2010. A continuation of this trend could boost profit margins up to 50% by 2012 ahead of our estimate of about 26% in 2012. This would result in about 5-6% upside to our price estimate for JP Morgan’s stock.