JPM's Core Results a Sign of Blah Yearend for Banks

JPMorgan Chase (JPM) treaded water in the third quarter, as it waited for a series of storm clouds to pass.

It's a storyline expected to be repeated by other big and midsize banks this earnings season — and perhaps the rest of the year.

While litigation costs pushed the largest U.S. bank to its first quarterly loss under Chairman and Chief Executive Jamie Dimon, its core banking business weathered the storm of weak demand — barely.

Lending totals at JPMorgan picked up where warnings about demand from several CEOs last month left off. Its loans grew 0.9% in the quarter compared with a year earlier, to $729 billion. Net interest income fell 1.8% to $10.8 billion.

Gerard Cassidy, an analyst at RBC Capital Markets, asked during a conference call Friday if JPMorgan had seen "a pickup in lending activity in September?" Marianne Lake, chief financial officer, did not directly answer, but her response gave an indication that loan demand is still very soft.

"It's a great question," Lake said. "It's relatively flat and steady performance in core middle market and strength in real estate."

To prepare for when the economy does turn in a more pleasing direction, JPMorgan went gangbusters collecting deposits. Total deposits rose 12% to $1.28 trillion, from a year ago.

Considering its weak loan demand, JPMorgan's turbocharged deposit gathering is probably a good tactic for right now, Glenn Schorr, an analyst at International Strategy & Investment Group, said in an interview.

"That's just real strong deposit growth," Schorr said. "Unfortunately there's not a lot to do with those deposits, so it's maybe a moral victory to have flat loan growth."

Meanwhile, mortgage revenues tanked, but JPMorgan previously "gave a good heads-up on mortgages that they would be going lower," Schorr said. It said in July that rising interest rates could lower its mortgage business by a third for the rest of the year. The yield on the 10-year Treasury bill has climbed nearly 100 basis points over the past year, hitting 2.66% on Friday morning.

Revenue from mortgage production, excluding losses from repurchases, fell 67% to $584 million, from a year ago.

Even so, third-quarter mortgage production was "better than we expected" compared to the second quarter, Schorr said. That's a "good leading indicator" for performance in the fourth quarter and in 2014, he said.

Still, as many banks have done, JPMorgan continued to cut back drastically on its mortgage-related staffing to handle the severe drop-off in business. It estimated that it will trim about 11,000 mortgage-related jobs this year.

Wells Fargo (WFC) and Citigroup (NYSE:C) have fired hundreds of employees in their mortgage units as rising interest rates cause home loan refinances to plummet. Analysts project banks with heavy exposure to mortgages will cut more jobs later this year.

Matthew O'Connor, an analyst at Deutsche Bank, during the conference call questioned the wisdom of JPMorgan exiting about eight business units, and cutting services to specific clients in four additional areas. O'Connor also questioned the added costs JPMorgan has incurred to beef up its regulatory compliance staff.

"Most people's view is that the nickels and dimes — I think there's some concern that it does start to add up," O'Connor said during the call. He noted that the exited business units equated to about $200 million in yearly revenue, and that the new compliance staff would add to its cost base.

"It does [add up], but again, we think we've maintained pretty good margins and pretty good capital," Dimon responded. "We have different ways to optimize and not all of the things we're simplifying were very profitable. So, remember, let's just focus on … the other things we're doing pretty well."

JPMorgan said Friday that it would exit its Canadian money order business and "cobranded business debit cards and gift cards," both of which were new disclosures. The bank had previously disclosed that it would be exiting other business lines, such as identify theft protection. Additionally, JPMorgan said it would stop making loans to check-cashing businesses.

The onslaught of investigations forced JPMorgan to set aside $23 billion in litigation reserves, and to take a $7.2 billion charge to cover legal expenses. The final tally for the third quarter was a $380 million loss, including the cost of cutting the mortgage jobs and exiting the business lines deemed peripheral.

Analysts and media representatives, in two conference calls Friday, repeatedly pressed Dimon and Lake to give more details about the litigation reserves and settlement costs. The executives consistently declined to discuss the matter in detail, although Dimon said the litigation was weighing on the bank, especially the third-quarter loss.

"Obviously it's very painful for me personally, because I agree with you I don't like losing money obviously for my shareholders," Dimon said.

John McDonald, an analyst at Sanford C. Bernstein & Co., asked if the federal government shutdown played a role in the delay in JPMorgan reaching a broad settlement on a number of different investigations, something that had been rumored as forthcoming.

"Maybe it's a little bit the D.C. shutdown, but in reality it's a complex thing," Dimon said. "It's a board-level issue and we want a fair and reasonable settlement if we can. It involves multiple [federal] agencies and that's all we can really say about it."