JPMorgan Chase Beats by a Mile on Improving Credit (Update 2)

  • JPMorgan Chase reports first-quarter profit of $6.5 billion or $1.59 a share.
  • Net revenue came in at $25.8 billion
  • The consensus estimate among analysts was EPS of $1.39 on revenues of $25.86 billion.

Updated from 9:02 a.m. ET with further management and analyst commentary.

NEW YORK ( TheStreet) -- JPMorgan Chase ( JPM) on Friday said its first quarter profit rose 33% year-over-year on the back of strong performance across its businesses and improving credit quality in its consumer banking business.

The New York banking giant reported record net income for the first quarter of $6.5 billion or $1.59 per share, compared to $5.69 billion or $1.39 per share in the fourth quarter and $4.92 billion or $1.19 per share in the first quarter of 2012.

Revenue for the first quarter was $25.85 billion, down 3% year-over-year, but up 6% from the fourth quarter. Analysts polled by Thomson Reuters expected earnings of $1.39 per share on revenues of $25.86 billion.

The results included a $656 million reserve release in the company's real estate portfolio and a $500 million reduction in credit card loan loss reserves. These items added 18 cents to earnings per share on a post-tax basis.

Atlantic Equities analyst Richard Staite said in an early note following the results that the earnings beat came from reserve releases and lower legal costs, with revenues mostly in line with forecasts.

The markets were not thrilled with the quality of the beat, with shares slipping 1.4% in early trading.

Chairman and CEO Jamie Dimon was upbeat in his commentary about the outlook for the bank and the economy.

"We are seeing positive signs that the economy is healthy and getting stronger. Housing prices continued to improve and new home purchases are also starting to come back," Dimon said. "We also saw strong performance in our credit card portfolio, with net charge-offs remaining near historic lows, another sign that consumers are healthier and more confident."

Dimon said the bank expects to release more reserves in consumer banking amid improving conditions. But he warned that loan growth was softening as small businesses remained cautious about the recovery and fiscal uncertainty.

First-quarter business banking loan originations were down 19% from the previous quarter and 20% from a year earlier, to $1.2 billion. Total loans declined 1% from the fourth quarter to $728.8 billion, but were up 1% year-over-year.

Investment banking fees rose 4% year-over-year to $1.4 billion. Fixed income and equity trading revenues were both up 50% from a weak fourth quarter, at $4.75 billion and $1.34 billion respectively, but down about 5% each year-on-year.

Analysts at Goldman Sachs had predicted first-quarter fixed income revenues of $4.9 billion and equity trading revenue of $1.5 billion.

Investment banking and capital markets were expected to be mixed bag for money center banks heading into first-quarter earnings season. After a strong start to the year, activity weakened in March amid concerns over Cyprus

JPMorgan Chase's mortgage production revenue declined, though volumes were stronger than predicted. Mortgage originations totaled $52.7 billion during the first quarter, up 3% quarter-over-quarter and 37% from a year earlier.

Mortgage production-related revenue, excluding repurchase losses, was $1.2 billion, a decrease of $401 million, or 25%, from the prior year, as gain-on-sale margins declined from record highs. Mortgage loan repurchase losses totaled $81 million during the first quarter, compared with a benefit of $53 million in the fourth quarter and losses of $302 million in the first quarter of 2012..

Analysts had predicted a 10% to 15% drop in mortgage production revenue. Management said during the conference call that they expect mortgage volumes to remain strong during the year, helped by refinancing.

As banks navigate through a difficult operating environment, the focus remains on expenses. Non-interest expenses at the bank declined 4% over the previous quarter and 16% over the previous year to $15.42 billion. JPMorgan trimmed headcount by 5,271 over the past year.

Legal expenses were down sharply, coming in at $300 million in the first quarter compared to $1.2 billion in the fourth quarter and $2.7 billion a year earlier. Litigation expenses tend to be lumpy.

The bank continued to highlight its "fortress balance sheet."

JPMorgan finished the quarter with an estimated Basel I Tier I Capital of 10.2%, down from 11% in the fourth quarter. However, the company said its estimated Basel III Tier I Common ratio increased to 8.9% from 8.7% the previous quarter. JPMorgan intends to achieve a Basel III Capital ratio target of 9.5% by the end of the year.

JPMorgan completed $2.6 billion in buybacks in the first quarter and said it may buy upto $6 billion through the first quarter of 2014. It also raised its dividend per quarter to 38 cents.

The bank's return on tangible equity also improved to 17% in the first quarter from 15% in the fourth quarter.

In its guidance, JPMorgan Chase said it expects net interest income for all of 2013 to decline 1% from 2012. The bank also said it expects to release $1 billion in loan loss reserves reserves in card, merchant services and auto. Expenses are likely to decline by approximately $1 billion.

Despite a relatively strong showing, JPMorgan faces tough questions from shareholders. The bank is under regulatory scrutiny after its "London Whale" hedge trading losses of at least $6.2 billion in 2012 exposed lapses in risk management and raised questions about controls at the company.

CEO Dimon warned in his annual letter to shareholders that the bank expects more regulatory action. Management would not elaborate on the matter in the conference call, but said it was related to issues that were in the news.

While Dimon has put in place a new management team in response to the debacle and has vowed to make instituting appropriate controls his top priority, some shareholders are still calling for him to step down as Chairman of the board.

Dimon did not address the issue in the media conference call, saying it was a board decision. Press reports have suggested that the CEO might depart the firm if his roles were split.

The trading debacle has also given plenty of ammunition to critics calling for a breakup of big banks. Wells Fargo analyst Matthew Burnell said in a note Thursday that pieces of JPMorgan's individual business are worth $64.83 a share. JPMorgan's stock closed Thursday at $49.31.

Dimon has strongly resisted calls for break-ups. In his annual letter to shareholders he cited the $14 billion in estimated revenues the bank gets from cross-selling, which he cites as an argument for remaining grouped together rather than split up.

JPMorgan is the first of the big banks to report earnings for the first quarter and sets the tone for earnings. Wells Fargo ( WFC) also reported Friday morning, beating expectations.

JPMorgan and Wells Fargo are among the healthiest banks and set the tone for the rest of the industry. Still, Nomura analyst Glenn Schorr said the bank's earnings did not inspire optimism about the performance of other banks.

"Profitability and organic growth solid, and JPM now sports a 3%+ dividend yield, but we think investors would like to see more from the group, considering the move up in the past four months was mostly built on multiple expansion," he wrote in an early note. "Results plus management outlook make us feel okay about JPM, but not necessarily the whole group (don't expect big estimate revisions higher). We see positive read throughs for brokers/universals ontrading being down 5% q/q vs. the -25%+ in our models and some asset managers, but flattish or uninspiring for the trust banks and regional banks."

-- Written by Shanthi Bharatwaj in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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