Traditional Banking Boosts JPM Profits, But Gaffes Raise Costs

Dark clouds — Chief Executive Jamie Dimon's pay cut, regulatory orders stemming from the London Whale — continue to hover over JPMorgan Chase (JPM), but its core banking business keeps chugging along.

Profit grew, year over year, in most business units. Deposit balances rose. Mortgage volume climbed, excluding costs to settle foreclosure litigation.

JPMorgan should benefit this year from rebounds in lending and investment banking, though other problems will persist, said Richard X. Bove, an analyst at Rafferty Capital Markets. Those problems, many tied to low rates and a still tepid economy, are the medicine that most banks will have to swallow along with incremental advances in the months ahead.

"Traditional banking seems to be moving forward somewhat," Bove said. "Margins are still going to be lower. Net interest income will still be under pressure."

Chase shares rose 0.2% to $46.45 in Wednesday morning trading.

Strong fundamentals propelled JPMorgan to report that fourth-quarter profit rose 53% to $5.69 billion, or $1.39 per share, from a year earlier. Analysts had estimated $1.22 per share, according to Bloomberg.

"The numbers are really good," Dimon said in a conference call with analysts. "Look at the underlying details of this company. [We posted] 15% return on tangible common equity."

Dimon and Chief Financial Officer Marianne Lake, handling quarterly earnings for the first time in her new role, were positive about JPMorgan's results. But not everyone could see past its dark clouds. Mike Mayo, an analyst with CLSA, put Dimon on the defensive when Mayo pointed out that JPMorgan has undergone "radical" changes since the London Whale incident in its Chief Investment Office (CIO), including management shakeups and enforcement actions.

"Does the [London Whale] incident change how JPMorgan is run?" Mayo asked during Wednesday's conference call.

"Obviously, when you have a problem like the Whale, you have mistakes, which you should acknowledge and then fix," Dimon said in response. "We obviously fixed CIO totally 100%."

Dimon may have been touchy because the JPMorgan board earlier decided to cut his 2012 compensation by 53.5%, to $11.5 million, largely because of the London trading losses. Still, during a conference call with analysts, Dimon said he "respected" the board's decision.

Big changes prompted by the London Whale incident include personnel shuffling; Lake was promoted after the demotion of former CFO Douglas Braunstein, and other executives were shifted around, including those in charge of Chase's investment bank and treasury and securities services.

"These are long tenured, very good, respected employees," Dimon said during the call.

Dimon led off two conference calls Wednesday, one with analysts and another with news media, by thanking Braunstein for his "service" to JPMorgan during a period when it reported "three record years of net income."

JPMorgan has been reliving the bad publicity it endured last year from the Whale losses and other matters.

Regulators  this week unveiled enforcement orders cracking down on JPMorgan's trading and anti-money-laundering controls. However, some outside observers have described the actions as no more than a "slap on the wrist" since they did not involve monetary penalties.

Separately, it has to pay about one-fifth the total cost of the $10 billion mortgage settlement reached with 10 different companies, according to the pact officially announced last week.

JPMorgan noted in its fourth-quarter earnings report that its final total loss for 2012 in its synthetic credit portfolio was $6.2 billion.

All the noise aside, Dimon and Lake bragged about JPMorgan's performance and outlook. Although Dimon said income from refinancings, which comprised 55% of its mortgage business in the fourth quarter, "over time will come down," mortgages are providing a big boost to JPMorgan, much like Wells Fargo (WFC).

"Housing has turned," Dimon said during the conference call with news media. "[New housing] starts … reductions in foreclosures … the whole gamut has changed."

Mortgage originations rose 33% to $51.2 billion, from a year earlier. Pretax income from mortgage production rose 390% to $789 million. Reduced loan-loss reserves for mortgages in its real estate portfolio contributed $700 million to earnings, or 11 cents per share.

Not all measurements of the mortgage business were positive. Total revenue from mortgage fees and related income fell 17%, to $2.04 billion, in the fourth quarter from the previous quarter. Still, it was an improvement from the fourth quarter of 2011, when revenue was $725 million.

Deposit-gathering was also strong in the quarter, which Chase plans to deploy in loans through its extensive, and growing, branch network. Total deposits rose 5.8% to $1.19 billion, from a year earlier.

"We are continuing to grow our deposits very strongly," Lake said. "We are continuing to grow our loans very strongly."

Bove chided JPMorgan Chase on its performance in controlling costs in the fourth quarter, on "which they didn't do a good job," he said. Expense items in the quarter included $900 million, primarily related to the Independent Foreclosure Review settlement; an increase of $2.9 billion increase in noninterest expense, primarily from its build-out of retail branches; and another increase of $5 billion in noninterest expense from higher personnel compensation in investment banking.