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2014 Is Year of Cutting for JPMorgan

NEW YORK (TheStreet) -- JPMorgan Chase (JPM - Get Report) on Tuesday laid out a detailed array of cost-cutting measures for 2014.

Following a difficult 2013, which saw the company adding thousands of staff members to handle an increasing regulatory compliance burden, as well as a major hit to earnings from $17.5 billion in fourth-quarter residential mortgage-backed securities settlements with government authorities, investors are hoping for a return to form for the nation's biggest bank.

JPMorgan earned $17.923 billion, or $4.35 a share during 2013, down from a record $21.284 billion during 2012. And in 2012, the company's earnings were lowered by over $6.2 billion, before tax, from losses related to the "London Whale" hedge trading debacle.  The company projects that over the next four to five years, in a normalizing interest environment, its annual core earnings should rise from $23 billion in 2013 to roughly $27 billion.

The company's return on average tangible common equity during 2013 was 11.92%, down from 14.72% in 2012 and 15.26% in 2011.

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The ROTCE numbers for the previous two years were impressive, but JPMorgan, even if 2014 turns out to be relatively "normal," with much less in the way of legal and regulatory pain, will have a difficult time pushing its ROTCE over 15%. This is because the company continues to build capital, in light of the Basel III requirement as a global systemically important financial institution (SIFI), with even more stringent requirements from U.S. regulators.  But the company's goal is for ROTCE to rise to a range from 15% to 16% over the next four years.

In its main presentation for investors, JPMorgan said its goal was to keep its overhead ratio in a range of 58 % to 59% as it has done over the past three years. The overhead ratio -- also known as the efficiency ratio -- is a bank's noninterest expense as a percentage of revenue.  The company's adjusted core expenses -- leaving out litigation costs -- declined to $59.0 billion in 2013 from $59.7 during 2012, and it expects adjusted expenses to fall below $59 billion during 2014.

The bank said it expected to reduce its total headcount for third straight year to 260,000 in 2014 from 265,000 in 2013, with a planned headcount reduction of 8,000 in its Consumer and Community Banking division.

The reductions would bring total staffing cuts to 24,500 in the bank's retail and mortgage operations since the start of 2013.

JPMorgan will also stop adding branches, previously stating it would hold its total U.S. branch count at 5,600.

The company listed quite a few products "non-core" to customers that it will exit. Much of this has previously been announced, including JPM's exit from its physical commodities business. A JPMorgan subsidiary in July settled Federal Energy Regulatory Commission allegations of energy market manipulation by agreeing to pay $420 million in "penalties and disgorgement to ratepayers."

The company listed many businesses it is exciting or reducing, and the list includes several items that are red-hot for regulators targeting JPMorgan.

Among other "non-core" products with "outsized operation risk," JPMorgan listed its Global Special Opportunities Group, Canadian money orders, Co-branded business debit cards and gift cards and "rationalization of products in Mortgage Banking."

The company will also "discontinue certain business with select clients," much of which was previously announced, including lending to check cashers, transaction services for roughly 500 correspondent banks and checking accounts for "certain foreign domiciled banks."

There's one more service the company will exit in this category, and it is especially lovely, in light of JPMorgan's role as a regulatory pin-cushion: "Checking accounts for foreign Politically Exposed Persons."  Altogether, the bank expects its "business simplification" to boost annual earnings by about $300 million.  But the real value of exiting controversial businesses could be much higher.

JPMorgan announced significant mortgage layoffs last year, as the wave of refinancing activity was curtailed as long-term interest rates rose. The outlook for this year is rather grim, in terms of volume, with the Mortgage Bankers Association forecasting a drop in U.S. originations of one-to-four family mortgage loans to $1.102 trillion this year from $1.755 trillion in 2013.

So there could be much more in the way of mortgage layoffs this year.

The company is addressing its regulatory risk by taking major steps to simplify its business and reduce headline risk, as well as regulatory risk.

If JPMorgan can bump that ROTCE back over 14%, or 15%, investors could be in for some hefty gains, as JPM is one of the cheapest bank stocks out there. The shares closed at $58.03 Monday and traded for 9.2 times the consensus 2015 earnings estimate of $6.34 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $5.98, which would be a record.

Among large-cap banks, only Citigroup (C) trades at a lower forward price-to-earnings ratio than JPMorgan Chase, as discussed in 'Too Big to Fail' Gets Even Bigger.

JPMorgan's shares were down 1.2% in morning trading to $57.30.

This chart shows the performance of JPMorgan's stock against the KBW Bank Index (I:BKX) and the S&P 500 (^GSPC) since the end of 2011:

JPM Chart data by YCharts

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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