JPMorgan Chase & Co., the largest U.S. bank by assets, reported second-quarter profit that beat analysts’ estimates as higher revenue from investment banking and trading overcame a drop in fees from mortgage lending.
Second-quarter net income rose to $6.5 billion, or $1.60 a share, from $4.96 billion, or $1.21, in the same period a year earlier, the New York-based company said today in a statement. The average estimate of 30 analysts surveyed by Bloomberg was for earnings of $1.45 adjusted for a one-time accounting item.
Chief Executive Officer Jamie Dimon, 57, has led JPMorgan to record earnings over the past three years as the Federal Reserve’s stimulus boosted the economy and bank profits. Concern that the Fed will pare bond purchases lifted long-term borrowing costs during the quarter. JPMorgan’s net interest margin, which measures profit on lending, narrowed to 2.2% from 2.37% in the first quarter.
“Their investment bank did very, very well, but they want to see core earnings going up, they want to see that balance sheet making money,” Paul Miller, an analyst at FBR Capital Markets, told Betty Liu and Erik Schatzker on Bloomberg Television. Instead the net interest margin “contracted, loan growth was relatively flat.”
Shares of the company rose to $55.34 at 10:02 a.m. in New York from $55.14 yesterday.
Chief Financial Officer Marianne Lake, speaking today on conference calls with journalists and analysts, estimated that demand for mortgage refinancings could drop 30% to 40% in the second half. The bank may accelerate a job-cut program announced earlier in the year, she added.
JPMorgan’s profits in the quarter benefited from an improvement at the unit that lost $4.4 billion on wrong-way derivatives bets in last year’s second quarter. Another contributor was the release of $1.39 billion in reserves that had been set aside to cover future loan losses.
Total revenue rose 13% from a year earlier to $26 billion. The biggest unit, consumer and community banking, showed a 3% decline from a year ago to $12 billion, while corporate and investment banking, run by Daniel Pinto and Michael Cavanagh, increased 10% to $9.88 billion.
The bank released about $550 million of reserves from the credit-card unit as consumer delinquencies and charge-offs improved, a trend that will continue for several more quarters, Lake told analysts on a call today. She said the net interest margin was compressed as the bank complied with regulators’ demands that it hold more liquid assets.
Trading revenue rose 18% to $5.37 billion in the second quarter, reflecting better performance in credit and equities products, the bank said. Those figures exclude a $355 million gain from a so-called debt-valuation adjustment in the second quarter as the price of its debt fell, compared with a $755 million gain a year earlier.
Dimon told investors June 11 that the bank’s trading revenue would rise by at least 15% from $4.5 billion a year earlier, even after Fed Chairman Ben S. Bernanke indicated on May 22 that the central bank could slow bond purchases as employment improves.
Ten-year Treasury yields that are used to set rates for some consumer and corporate loans rose from this year’s low of 1.63% on May 2 to 2.74% on July 5, the highest since August 2011.
Rising rates reduce the value of banks’ bond holdings and cut mortgage-fee revenue for home-lenders such as JPMorgan and Wells Fargo, which also reported earnings today.
Losses on Securities
Under accounting rules, banks can exclude gains and losses from securities categorized as “available-for-sale” from the income statement and instead include them in a line called accumulated other comprehensive income. That line, called AOCI, dropped to $389 million in the second quarter from $3.49 billion in the first quarter, according to figures on JPMorgan’s website.
JPMorgan’s consumer and community banking business, which includes home loans and checking accounts, earned $3.09 billion, down 6% from $3.28 billion a year earlier as mortgage-fee revenue declined.
Mortgage fees and related revenue dropped 20% to $1.82 billion, compared with $2.27 billion a year earlier.
Industrywide refinancings, which accounted for 76% of last year’s $1.75 trillion in loan originations, slumped after rates on 30-year loans jumped from an average of 3.51% the week before Bernanke spoke to 4.46% at the end of June, data compiled by Freddie Mac show. Refinancing applications throughout the industry fell 42% from May 17 to July 5, according to Joel Kan, an economist at the Mortgage Bankers Association, a Washington-based trade group.
Lenders have been cutting staff and reducing expenses in response to slowing global growth and historically low interest rates, which compressed profit margins on lending as well as yields on investments.
JPMorgan is eliminating as many as 19,000 jobs in its mortgage and community-banking divisions through 2014 as Dimon trims expenses, the firm said in February. Employing about 259,000 people at the end of December, JPMorgan will cut 13,000 to 15,000 jobs in its mortgage unit and 3,000 to 4,000 in community banking excluding home lending through the end of next year, the company said. The number of personnel firmwide will shrink by about 4,000 people this year.
“We’re on track with that, but obviously given what’s going on in the market, there could be some acceleration,” Lake said today on a conference call with journalists.
Fewer consumers fell behind on their credit-card payments in the second quarter compared with the same period in 2012. Loans at least 30 days overdue, a signal of future write-offs, fell to 1.69% from 2.14% in 2012. Write-offs dropped to 3.31% from 4.35% the prior year and 3.55% in the previous quarter.
JPMorgan set aside $600 million more toward its litigation costs during the second quarter.
The bank’s bet on credit derivatives in a London unit cost more than $6.2 billion in the first nine months of last year. Under regulatory orders to tighten internal controls following the loss, JPMorgan will face more sanctions in the coming months, Dimon told shareholders in a letter released April 10.
Revenue in asset management, which includes JPMorgan’s mutual-fund family, retirement planning, hedge funds and private bank, climbed 15% to $2.7 billion, and profit jumped 28% to $500 million. Run by Mary Erdoes, the division grew assets under management 9% to $1.5 trillion.
JPMorgan said today that its estimated liquidity coverage ratio was 118%, topping the proposed minimum of 100%. The Basel Committee on Banking Supervision’s standard, scheduled to be phased in starting in two years, requires banks to hold enough “high-quality liquid assets” -- predominantly cash and government debt -- to survive 30 days of stress. Lake said in April that the firm fell short of the standard in the first quarter and vowed to be compliant by the end of this year.