JPMorgan Reports Lukewarm Q4 Results To Finish A Forgettable 2013

There was nothing unexpected in JPMorgan Chase’s (NYSE:JPM) earnings release for the fourth quarter and full year 2013 this Tuesday, with the diversified banking group coming up with a mixed performance for the period. ^[1] While investment banking activity remained at sub-par levels for the second consecutive quarter, the bank’s strong retail & commercial banking business made up for a chunk of the shortfall. The Q4 numbers were peppered with quite a few one-time gains and losses though, including the $1.1 billion gain from the sale of Visa (NYSE:V) shares and One Chase Manhattan Plaza, a $1.1 billion legal charge from the recently reached Madoff settlement (see Complicity in Madoff Scheme Costs JPMorgan $2.6 Billion) and a $1.2 billion accounting charge from the revaluation of its own debt. The income statement also benefited from improving credit conditions which allowed the bank to release considerable loan provisions for its mortgage business.

These results bring the litigation-riddled 2013 to a close for JPMorgan, with exceptionally strong performance over the first half of the year carrying full-year results. The bank reported its first quarterly loss in a decade in Q3 2013 thanks to the multi-billion dollar legal reserves it set aside then (see Despite Quarterly Loss, JPMorgan Remains Strong), even as growing interest-rate uncertainty over the second half of the year from the Fed’s proposed tapering plan hit the performance of its investment banking operations.

We believe that the headwinds JPMorgan is currently facing are temporary and should ease up within a quarter or two. The strides the bank has taken in resolving its legal backlog are great news for its long-term profitability. In view of this, we have raised our price estimate for the bank’s shares from $60 to $62.

See our full analysis of JPMorgan

Investment Banking Revenues Continue To Slide…

The low debt market activity over the latter half of the year was already expected to hit trading revenues at the largest global investment banks. But the impact on JPMorgan’s top-line was amplified by accounting charges of $2.1 billion for the fourth quarter. This included a $1.5 billion loss from the bank’s first-time implementation of  funding valuation adjustment (FVA) for its OTC derivatives and structured notes. In contrast, JPMorgan reported an accounting charge of $409 million in Q3 2013 and $586 million in Q4 2012.

Adjusting for these charges, JPMorgan’s sales & trading revenues for the last quarter were exactly the same as that for Q4 2012 ($4.07 billion) and a good 15% below the $4.7 billion figure for the previous quarter. The decline in FICC trading revenues has been particularly sharp, falling from $4.75 billion in Q1 2013 to $3.2 billion in Q4 2013 – a 33% reduction.

The reduction in global M&A as well as debt underwriting activity over the period did not help either – with fees from these lucrative revenue lines also remaining depressed.

… But Other Operations Provided A Respite

The biggest positive for JPMorgan’s business model is its considerable amount of diversification, thanks to which there are always some business segments that boost its overall results. This time around, the credit card, commercial banking as well as asset management business segments came through for the banking giant with sequential improvements in revenue and/or net income.

One positive for the quarter, and year, was the healthy growth in the bank’s card volumes. Customers used cards issued by JPMorgan Chase to make purchases of almost $420 billion in 2013 – 10% more than the $318 billion figure for 2012. A steady improvement in the country’s economic conditions is primarily responsible for this. The bank also added 7.3 million new card accounts over the year. Notably, 55% of these accounts were added online by the bank which implies lower customer acquisition costs going forward. We expect this trend to help future margins for JPMorgan’s card business. As you can see from the chart above, our analysis shows that the card business adds more value to the bank (23%) than any other division.

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1. 4Q13 Earnings Press Release, JPMorgan Press Releases, Jan 15 2013 [↩]