Legal Costs Dent JPMorgan’s Q4 Results
JPMorgan Chase (NYSE:JPM) failed to meet investor expectations for its fourth quarter results on Wednesday, January 14, as poor trading revenues and $990 million in litigation-related charges resulted in a 7% reduction in net income for the bank on a year-on-year basis. [1] The fact that the bank saw a reduction in revenues for each of its operating segments compared to the year-ago period also did not help investor sentiments. The country’s largest bank has now missed earnings expectations for two consecutive quarters – something that was largely responsible for its shares losing 3.5% of their value over the day.
There were some things that worked in JPMorgan’s favor this quarter, however. The bank’s advisory and underwriting operations stood out in particular with the best quarterly performance in more than three years. While the payment business generally sees huge gains in the last quarter of the year thanks to the holiday season, JPMorgan’s card unit witnessed an exceptionally strong quarter, with card payment volumes jumping 10% compared to Q4 2013. Also, the asset management business continued to rake in more client money over the period to take the total assets under management to record highs.
We maintain our $65 price estimate for the bank’s shares. This is almost 15% ahead of its current market price.
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Underwriting Fees Mitigate Poor Debt Trading Revenues Somewhat
JPMorgan’s corporate and investment banking division generated $7.8 billion in revenues for Q4 2014 when adjusted for the $452 million accounting charge from a revaluation of its own debt. This includes revenues from the bank’s advisory and underwriting, trading as well as treasury and securities services operations. In comparison, the bank reported total adjusted revenues of $8.9 billion in Q3 2014 and $8.3 billion in Q4 2013. The shortfall can be accounted for almost completely by the sharp reduction in JPMorgan’s FICC (fixed income, currencies and commodities) trading revenues over the period, which were just over $2.5 billion – 32% lower than the $3.7 billion earned in the previous quarter and 23% below the $3.3 figure a year ago.
However, JPMorgan’s advisory and underwriting operations fared quite well over the period – generating more than $1.8 billion in revenues for the first time since Q2 2011. The debt underwriting desk had a particularly profitable run, as it generated a record $1 billion in revenues for the period. This compares to debt underwriting fees of $715 million in Q3 2014 and $801 million in Q4 2013.
Cards, Asset Management Business Help Salvage Results
JPMorgan’s card business saw an increase in card payment charge volumes to its highest-ever figure of $123.6 billion in Q4 2014 thanks to the peak activity level seen around the holiday season. At the same time, Chase Paymentech Solutions – JPMorgan’s merchant payment offering – notched more than 10 billion transactions for the quarter for a record total merchant processing volume of $230 billion. Both these factors helped boost the bank’s card fee income for the period. More importantly, the bank’s outstanding card balances crossed $127 billion in Q4 2014 after falling below that level in early 2012 – allowing the bank to report a net interest income just shy of $3 billion for its card business.
JPMorgan’s asset management arm continued its strong run, with the division reporting net positive inflows of long-term assets for the twenty-third consecutive quarter (each quarter since Q2 2009). This helped the total assets under management (AUM) grow to a record $1.74 trillion at the end of Q4 2014 – a 9% improvement compared to Q4 2013 and a 2% increase sequentially. As a result, fee revenues directly attributable to this division increased to a record $2.4 billion. The benefit did not reflect in the bottom line, though, as higher operating costs nullified the gains from higher revenues.
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- 4Q14 Earnings Press Release, JPMorgan Press Releases, Jan 14 2015 [↩]