JPMorgan Chase reported an 18.5 percent slump in first quarter earnings Friday, as the nation’s largest bank grappled with dual challenges: sluggish revenue from trading and lackluster mortgage lending.
Both issues, broadly buffeting the banking industry, dampened profits at JPMorgan. Its net earnings of $5.27 billion, or $1.28 a share, came in slightly below Wall Street analysts’ expectations of $1.40 a share on revenue of $24.53 billion. Revenue dropped to $23.86 billion.
The bank’s stock dropped when the market opened Friday, eventually falling nearly 4 percent to close at $55.30.
As the nation’s largest bank, JPMorgan has become a kind of bellwether for the broader industry. The lukewarm results Friday underscored how Wall Street has struggled to recoup the revenue drained from a slowdown in trading. Compounding the problem, revenue from underwriting bonds has also dipped in recent quarters.
At an investor conference in February, JPMorgan executives foreshadowed the slowdown, predicting that revenue from trading would fall by roughly 15 percent from just a year earlier.
Ahead of the earnings report, some bank analysts said they expected the trading woes to be aggravated as the nation’s biggest banks adapt to new rules on derivative trading.
Still, Wells Fargo, which relies far less than its rivals on fixed-income trading and traditional Wall Street activities under pressure from a spate of new regulations, sidestepped some of the problems bedeviling JPMorgan.
On Friday, Wells Fargo reported profit of $5.9 billion, up 14 percent from 2013, bolstered by growth in both commercial real estate and auto loans. Wells Fargo’s revenue did fall to $20.6 billion from $21.3 billion in the same period a year earlier.
Wells Fargo has been a darling of bank investors since the financial crisis. The lender easily passed the Federal Reserve’s recent stress test, and its stock has soared in the past year.
For JPMorgan, the results also pointed to just how expensive it has been for the bank to win some kind of peace with Washington. The bank has paid roughly $20 billion in just the past 12 months to resolve a spate of government investigations.
Jamie Dimon, the bank’s chief executive, discussed the steep price of reconciliation in his annual letter to shareholders.He also emphasized that negotiating settlements - including a $13 billion agreement with government authorities over the sale of mortgage securities in the years before the financial crisis - while trying to reduce risk, has been “painful” and “nerve racking.”
In fact, in the third quarter of last year, the hefty legal costs led JPMorgan to report its first quarterly loss under Dimon’s leadership.
Part of the slowdown came from a slowdown in revenue from fixed-income trading, which fell roughly 26 percent to $3.76 billion from $4.75 billion a year earlier.
Marianne Lake, JPMorgan’s chief financial officer, said on a conference call Friday that it was tough to pin the slackening in fixed income trading to any single factor.
Dimon has continued to sound an optimistic tone, emphasizing that the bank has worked to move beyond its legal problems. With those settled, Dimon has said the bank and its senior executives can focus on further expanding the businesses.
“JPMorgan Chase had a good start to the year, given there were industry-wide headwinds in markets and mortgage,” he said in a statement Friday. Reiterating that point on a call with reporters Friday, Dimon emphasized that quarterly net earnings of $5.27 billion should not be dismissed, especially in an increasingly challenging environment.
JPMorgan’s earnings contained several bright spots, including an increase in average loan balances within the commercial banking business, along with an uptick in auto loans.
Auto loans grew by 3 percent to $6.7 billion from $6.5 billion a year earlier. Private banking was another rosy area for the bank, with revenue rising to $1.5 billion, up 4 percent from the same period last year. Credit card sales volume also grew, up 10 percent to $104.5 billion from the same period last year.
However, those businesses could not completely offset the decline in trading revenue and mortgage refinancing, which had once been a particularly robust source of profit for JPMorgan and its rivals.
Rising interest rates, coupled with an increase in housing prices, have damped homeowners’ appetite to refinance. Mortgage loan originations also dropped to $17 billion, down 68 percent from a year earlier and 27 percent from the previous quarter. That helped push net income down by $559 million to $114 million for the first quarter. Analysts have winced at the mortgage slowdown.
Asked whether the fall in mortgage loan originations might prompt the bank to broaden its lending to a wider swath of people - even those with tarnished credit scores - Dimon said Friday that “our credit standards are pretty consistent.” He added, “We feel pretty good about the risk that we are taking.”
The comment reflects a deep timidity among the banks, which have focused their lending almost exclusively on borrowers with good credit. In part, the banks are reluctant to take on risk and are skittish about exposing themselves to litigation related to any questionable mortgages.
Business, Pages 31 on 04/12/2014