NEW YORK — JPMorgan Chase & Co. (JPM) reported strong first-quarter revenue as demand for new loans continued to increase and capital market activity improved.
Yet, the financial crisis continues to haunt JPMorgan: Its $5.4 billion profit reported early Friday was down 3.1% from a year earlier due to legal expenses, and charges related to the value of its own debt masked the increase in revenue.
Chief Financial Officer Douglas Braunstein, during a conference call with reporters, said the quarter showed a "solid performance across most of our businesses," including "real strength" in capital markets and "significant improvement in mortgage banking."
JPMorgan's quarterly profit got a $1.8 billion boost because the bank reduced its overall reserve, the money set aside for potential future losses from delinquent loans. That, "ultimately... carried the day," said JMP Securities analyst David Trone.
Revenue rose 6% from a year earlier and 24% from the previous quarter, to $26.7 billion. Analysts had expected $24.68 billion of revenue, according to Thomson Reuters. But expenses rose faster than revenue, mainly because compensation in capital markets businesses increased. The bank still expects costs to remain flat this year.
Loans to businesses large and small continued to increase, partly a reflection of an improving economy. Corporations have cash, and "housing is getting very close to the bottom," Chief Executive Jamie Dimon said during the call. Consumer debt is "back where it was 20 years ago."
"I wouldn't overreact" to recent disappointing employment growth that has recently rattled markets. The economy "looks OK...we all wish it were a little stronger," Dimon said. "Whether we have a strengthening recovery, we don't know yet."
CFO Braunstein also addressed the issue of derivative trading in London by Bruno Iksil, which has recently caused controversy. He said the bank reduced its structured credit book "over time" and "we are very comfortable with the positions we have."
Braunstein said the bank collects more deposits than it makes loans and invests the difference, which in the first quarter was $360 billion. Those investments need to be hedged to protect JPMorgan's balance sheet, a practice that is "consistent both, I think, with the spirit and the written rules" of the Volcker rule of the Dodd-Frank financial overhaul act.
Dimon added during a conference call with analyst later, the issue is "a complete tempest in a teapot."
The banking giant's results kick off the reporting season for U.S. banks, delivering investors the first look at a quarter expected to show improvements at the nation's largest financial institutions after a bleak end to 2011.
Nomura analyst Glenn Schorr called the quarter the "same strong JPM story" as in previous quarters. Shares, however, fell 1.6% in morning trading, to $44.12 in a down market.
JPMorgan's investment banking arm bounced back in the first few months of the year, turning in a profit of $1.68 billion, down 29% from a year earlier but more than double what it booked in the fourth quarter.
The bank's retail services business, which handles consumer and small-business clients, reported a profit of $1.75 billion, compared with a $399 million loss a year earlier and $533 million profit in the fourth quarter.
The $2.5 billion reserve for litigation expenses, mainly tied to mortgage banking, was considerably higher than the $528 million JPMorgan took in the fourth-quarter. CFO Braunstein said the bank is unlikely to add significantly to that reserve in future quarters, and Dimon told analysts that the addition in the first-quarter came after a "thorough review" of all possible litigation matters, including mortgage-backed securities investors' demands that the bank take back faulty mortgages.
JPMorgan reported earnings of $1.31 a share, up from $1.28 a year earlier as the share count outstanding declined. The latest quarter included a net 8 cents a share loss tied to litigation expenses and changes in the value of the bank's debt. Analysts polled by Thomson Reuters expected a per-share profit of $1.18, excluding debt-related charges.
Overall, the bank's credit-loss provisions — funds set aside each quarter to offset loan losses — totaled $726 million, down from $1.17 billion a year earlier and below the $2.18 billion set aside in the fourth quarter. The provision in middle-market commercial and in consumer lending rose, but that is a reflection of loan demand in those divisions, Braunstein said. More loans require higher reserves for potential defaults.
