JPM Is a Survivor

Updated from 7:49 a.m. EST on Jan. 15.

With expectations running low, the lack of "more negative" surprises in JPMorgan Chase's (JPM - commentary - Cramer's Take) results is driving a nice pop in the stock despite another declining market.

JPMorgan reported EPS of 86 cents vs. the Street's consensus of 92 cents, with revenue of $18.27 billion handily beating the $17.05 billion Street number. Most importantly, the balance sheet remained strong: Tier 1 capital of $88.7 billion yielded a ratio at 8.4%, one of the strongest in the industry according to management.

The company has factored a declining home price environment into all its relevant business lines and has reserved as far ahead as is possible under GAAP. Interestingly, despite a view that home price declines are worse than generally perceived, JPMorgan doesn't believe that home prices are driving delinquency rates higher (rather it is other factors, like the economy). Nonetheless, by business line, the investment bank performed the worst, due to trading losses and the usual markdown issues.

The investment bank did earn $124 million, a 3% margin on revenue of $3 billion. Advisory and underwriting fees grew, but fixed-income and equities revenue declined 70%. Credit costs nicked the investment bank for $200 million, a result of reserving mostly. Mortgage exposures are under control: Collateralized debt obligation warehouse positions are at $5 billion, commercial mortgage-backed securities are $15.5 billion, and Alt-A mortgages are $6.4 billion (remember: against a tier 1 capital position of $89 billion). Level 3 assets sit at 5%, so pricing issues are not at the forefront.

Retail financial income grew 5%, with net interest income up 5% and fees up 15%. Interestingly, fourth-quarter results included a half-billion-dollar upward valuation adjustment to the mortgage servicing reserve asset. The business is raising the charge-off rate to 1.55% to 1.6% going forward, a conservative move.

Card services revenue grew 6%, with better margins, yet net income shrunk as credit costs increased 40% year over year. Management prudently increased reserves, although the company is not yet seeing major delinquency rate issues in this business.

The commercial bank did quite well, with income up 13% on a 6% rise in revenue. Treasury services and lending drove results; average loans were up 14%. Treasury specifically grew 65% on 26% revenue growth. Higher client volumes drove results.

Finally, asset managment soared, with income up 29% on a 23% revenue gain. Assets under management grew 18%, to over $1 trillion.

Refreshingly, one of the "too big to fail" banks is not failing, and traders are rewarding it accordingly this morning. While not immune to the issues washing over the financial sector, JPMorgan does stand out as a well-diversified and conservatively run behemoth that will ultimately be a consolidator in the business.

All financial stocks will be volatile, but investors can sleep a bit easier with new evidence that JPMorgan will be a survivor, and perhaps thrive, as the industry works through its issues.

JPM Preview: M&A Rumors Flying

The main questions surrounding every bank as they report earnings this month are, "How big will the write-offs be? And is this the end?" Now, after a couple rounds of stinging write-offs, no one will believe managements anyway if they claim this is the end.

JPMorgan Chase (JPM - commentary - Cramer's Take) did not escape the subprime contagion and is increasing its loss provisions accordingly, guiding to $250 million to $270 million of quarterly charge-offs in home loans. Analysts do wonder if the company will surprise the Street with any huge write-offs, a la Citigroup (C - commentary - Cramer's Take) or Merrill Lynch (MER - commentary - Cramer's Take), but that prospect seems unlikely at this point, since the "news" wasn't leaked as is typical.

The Street is looking for 93 cents of EPS on $17.13 billion in revenue. Reflecting JPMorgan's position as a savior rather than victim, estimate cuts have been modest; that 93-cent estimate is only down from $1.12 as of August.

JPMorgan Chase's home loans outstanding are $93 billion, with $17 billion in 90%+ loan-to-value paper, the riskiest assets currently. If the company's experience is similar to other banks, investors could see a greater than $1 billion write-off this quarter, which is ugly to be sure, but far from the disaster that banks like Citi are posting. Meanwhile, JPMorgan's other businesses remain reasonably strong to support the retail bank. Asset management, private equity and treasury are all performing admirably.

With JPMorgan Chase positioned to be a consolidator rather than consolidatee, the rumors are already swirling. The company did buy a $4 billion loan portfolio from struggling Northern Rock recently. Today's rumor has JPMorgan acquiring Washington Mutual (WM - commentary - Cramer's Take). Possible, but unlikely that the company will announce it on the call tomorrow.

Nonetheless, investors will look for clues to management's intended aggressiveness in pursuing opportunities in the busted lenders. With a Tier 1 capital ratio of 8.4%, JPMorgan Chase clearly possesses the financial strength to be an acquirer of distressed assets.

The call starts at 9:00 a.m. EST.

---

At the time of publication, Dvorchak had no positions in the stocks mentioned, although positions can change at any time.

Gary Dvorchak is a managing partner of Aviance Capital Management, a Sarasota, Fla.-based institutional asset manager which manages $140 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.