JPMorgan Shares Fall After Bank Reports Slow Start To The Year

JPMorgan Chase’s (NYSE:JPM) shares lost almost 4% of their value over trading on Friday, April 11, after the country’s largest bank reported a worse-than-expected performance for the first three months of the year. ((1Q14 Earnings Press Release, JPMorgan Press Releases, Apr 12 2014)) Although JPMorgan’s earnings did not change much quarter-on-quarter, revenues were 8% below the figure for Q1 2013, resulting in a 19% decline in income – something that did not sit well with investors given that the cyclical investment banking business normally generates its highest earnings in the first quarter. The decline can indeed be traced back to a poor performance by the trading desk, as JPMorgan reported a 17% reduction in trading revenues (fixed-income and equities combined) for the period. To make things worse, the bank witnessed a decline in profitability across its business divisions – notably its mortgage banking and commercial banking units – which only added to investors’ concerns.

JPMorgan did have some good news for investors though, as the bank incurred no litigation-related expense this quarter – something that bogged down results considerably over the second half of 2013. This helped non-interest expenses fall 5% compared to the same period last year, and 6% sequentially. Also, net interest margin figures improved slightly as the bank’s interest rate spread improved for the second consecutive quarter after falling each quarter for two years.

We believe that the negative impact of slowing revenues across JPMorgan’s business model and the corresponding weak performance for Q1 nullify the potential upside presented by the better-than-expected capital return plan the bank announced last month (see JPMorgan’s $6.5 Billion Share Repurchase Plan Complements 5% Dividend Hike), which is why we maintain our $62 price estimate for the bank’s shares. This is more than 10% ahead of its current market price.

See our full analysis of JPMorgan

Investment Banking Activity Improves, But Not Quite Enough

JPMorgan reported total revenues of $8.6 billion for its corporate & investment banking division, which includes its advisory & underwriting, sales & trading as well as treasury & securities services operations. The trading unit was responsible for a little over $5 billion of this figure – a notable improvement from the $4 billion figure in Q4 2013 as well as the $4.5 billion in Q3 2013. But it must be noted that low debt market activity over the latter half of 2013 hit trading revenues across investment banks for that period. Also, investment banks often report a peak in trading revenues for the first quarter – something that is clear from the roughly $6.1 billion in trading revenues JPMorgan reported in Q1 2013. So one can conclude that although trading activity has picked up around the globe, it is still well below what we have seen in the first quarters of recent years.

The sequential reduction in global M&A and underwriting fees for the period also did not help. Total advisory and underwriting fees fell 14% from $1.67 billion in Q4 2013 to $1.44 billion for Q1 2014, and were essentially same as the $1.43 figure for Q1 2013. Fortunately, the comparatively lower revenues for the investment bank as a whole also meant that JPMorgan set aside less money to compensate its employees – resulting in an 8% reduction in non-interest expenses for the period compared to the same quarter last year. This mitigated the impact of the fall in revenues on the bottom line to a great extent.

Mortgage Banking Demand Continues Freefall

While the slow performance by JPMorgan’s investment banking operations had the most impact on its overall results for the quarter, the unit that was hit the worst over the period was its mortgage banking operations. The bank reported a 65% decline in mortgage-related fees, as they fell from $1.45 billion in Q1 2013 to $514 million in Q1 2014. These was also a 53% sequential fall from $1.1 billion in Q4 2013, with two primary causes: a marked reduction in the demand for fresh mortgages, which cut mortgage origination fees in half, and an improvement in the overall interest rate environment, which hit valuations for its mortgage servicing arm.

Mortgage origination volumes of $17 billion were among the worst for a quarter since 2010, and well below the $52.7 billion figure for the year-ago period. This is largely in line with the considerable reduction in mortgage application volumes, which sank from $60.5 billion in Q1 2013 to $26.1 billion in Q1 2014.

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