JPMorgan Chase & Co. reported its first loss under Chief Executive Officer Jamie Dimon after taking a $7.2 billion charge to cover the cost of mounting litigation and regulatory probes.
The third-quarter loss was $380 million, or 17 cents a share, compared with a profit of $5.71 billion, or $1.40, a year earlier, the New York-based company said today in a statement. Shares of the company rose 2.6% at 7:50 a.m. after profit adjusted for one-time items beat analysts estimates.
Dimon, 57, who led JPMorgan to record earnings in each of the past three years, is grappling with regulatory investigations and tightening internal controls following its more than $6.2 billion trading loss last year. The legal costs contributed to a 54 percent surge in non-interest expenses to $23.6 billion, as revenue dropped 8% from a year earlier.
In this highly charged and unpredictable environment, with escalating demands and penalties from multiple government agencies, we thought it was prudent to significantly strengthen the banks legal reserves, Dimon said in the statement. While we expect our litigation costs should abate and normalize over time, they may continue to be volatile over the next several quarters.
JPMorgan rose to $53.90 in New York trading from $52.52 at the close yesterday. Earnings adjusted for one-time items were $1.42 a share, exceeding the $1.30 average estimate of 20 analysts surveyed by Bloomberg.
LITIGATION RESERVES
The pretax legal charge was $9.2 billion, compared with $684 million a year earlier. Litigation reserves at the end of September were $23 billion, the bank said, adding that reasonably possible losses in excess of those reserves were $5.7 billion.
JPMorgan said on Aug. 7 that its mortgage-bond sales practices were under criminal investigation by U.S. prosecutors in California. The company has been discussing a potential $11 billion deal with state and federal authorities to settle that case as well as other related investigations, a person with knowledge of the talks said last month.
The firm is also facing an investigation of its hiring practices in Asia and a criminal inquiry into its energy trading business.
The company agreed on Sept. 19 to pay about $1.3 billion to resolve U.S. and U.K. investigations into a record trading loss in 2012 and to settle unrelated claims it unfairly charged customers for credit-monitoring products.
EMPLOYEE INDICTMENTS
Two former employees were indicted Sept. 16 on charges including securities fraud and conspiracy in connection with the trading loss on credit derivatives that exceeded $6.2 billion last year. Bruno Iksil, who built the position and came to be known as the London Whale because of the size of the bets, is cooperating in the investigation and hasnt been charged, prosecutors said.
Revenue at the corporate and investment-banking unit, run by Daniel Pinto and Michael Cavanagh, declined 2% to $8.19 billion.
Trading revenue fell 2% to $4.69 billion in the third quarter, the bank said. Fixed-income trading revenue declined 8% to $3.44 billion from a year earlier. Equity trading revenue rose 20% to $1.25 billion.
Chief Financial Officer Marianne Lake told investors Sept. 9 that JPMorgans third-quarter revenue from stock and bond trading may decline as much as 5% from a year earlier, when it produced $4.77 billion.
TREASURY YIELDS
Ten-year Treasury yields, which are used to set rates for some consumer and corporate loans, rose from this years low of 1.63% on May 2 to 3% on Sept. 5.
Rising rates reduce the value of banks bond holdings and cut mortgage-fee revenue for home lenders such as JPMorgan and Wells Fargo & Co., which also reports earnings today.
Refinancings, which accounted for 76% of last years $1.75 trillion in loan originations, slumped after rates on 30- year loans jumped from historical lows of less than 3.5% earlier this year to an average of 4.32% at the end of September, data compiled by Freddie Mac show. Mortgage volumes were estimated to have fallen 25% from $494 billion in the second quarter to $369 billion in the third, according to data from the Mortgage Bankers Association, a Washington-based trade group.
MOST CHALLENGING
This quarter is probably going to be the most challenging quarter the banks are going to have since they began their recovery over two years ago, Marty Mosby, an analyst with Guggenheim Securities in New York, said in a Sept. 30 interview. Interest rates that rose shockingly high damped trading results and paralyzed home lending, which had been gaining momentum in the first half of the year, he said.
JPMorgans consumer and community banking, which includes home loans and checking accounts, earned $2.7 billion, up 15% from a year earlier. The net interest margin, which measures the profit margin on lending, narrowed to 2.18% from 2.43% a year earlier and 2.2% in the second quarter of this year.
Mortgage fees and related revenue plunged 65% to $839 million, compared with $2.38 billion a year earlier.
Fewer consumers fell behind on their credit-card payments in the third quarter compared with the same period in 2012. Loans at least 30 days overdue, a signal of future write-offs, dropped to 1.69% from 2.15% in 2012. Write-offs declined to 2.86% from 3.57% the prior year and 3.31% in the previous quarter.
ANNUAL PROFIT
Mounting fines and other sanctions are eroding JPMorgans profit for the year and placing the firms $6 billion share- repurchase program at risk, Charles Peabody, an analyst at Portales Partners LLC, wrote in a Sept. 25 note to investors. He cut his 2013 earnings estimate 12.5% to $4.90 a share.
Both the materiality of the potential litigation charges and the potential suspension of the share-repurchase program could have a significant impact on the banks stock, Peabody wrote.
JPMorgan slowed its pace of stock buybacks in the third quarter. The bank repurchased $739.7 million of shares in the period, down from $1.17 billion in the three months ended June 30 and $2.58 billion in the first quarter of the year.
ASSET MANAGEMENT
Revenue in asset management, which includes JPMorgans mutual-fund family, retirement planning, hedge funds and private bank, rose 12% to $2.76 billion, and profit increased 7% to $476 million. Run by Mary Erdoes, the division grew assets under management 12% to $1.54 trillion.
Dimon survived a shareholder vote in May recommending the board split his dual duties as chairman and CEO. He said the bank will fight till the end anyone who sues the company claiming they were misled over the London losses at the chief investment office.
The CEO stepped down as chairman of JPMorgans main operating subsidiary July 1, according to a person briefed on the matter. JPMorgan has sought to bolster corporate governance and rebuild its relationship with supervisors after U.S. regulators and a Senate panel faulted the firm for withholding information during the trading losses last year.
Dimon, who is still chairman of the parent corporation, handed off the title at the subsidiary because company attorneys recommended it for technical reasons, rather than because of pressure from regulators or investors, said the person.
The board cut Dimons pay in half for 2012 after concluding that he bore some responsibility for the trading loss. It also credited his leadership for the lenders performance. JPMorgan reported a third straight year of record profit in 2012 with $21.3 billion of net income.
The investigations are a concerted effort to convince Jamie Dimon that he needs to be much more accepting of regulatory suggestions, Mosby said. Dimon, who has railed against excessive regulation and once publicly challenged Fed Chairman Ben S. Bernanke on new bank rules, needs to work with regulators instead of fight with regulators, Mosby said.
