JPMorgan earnings drop on weak trading

By Tom Braithwaite in New York

JPMorgan Chase launched Wall Street’s earnings season with what chief executive Jamie Dimon called “modestly disappointing” results, as weak trading in its investment bank contributed to a 23 per cent year-on-year drop in fourth-quarter net income.

Shares in JPMorgan fell more than 3 per cent on Friday morning after the bank announced $3.7bn of net income, or 90 cents a share, for the fourth quarter, compared with $4.8bn, or $1.13 a share, in the same period in 2010.

Analysts’ consensus estimate was for earnings of 92 cents a share. It was the investment bank, and particularly the equity trading division, that dragged down the results, auguring badly for the likes of Goldman Sachs and Morgan Stanley, the most trading-focused Wall Street names, which report next week.

The equity markets division reported revenue of $779m, a sharp decline from $1.1bn in the same period in 2010 and from the $1.4bn in the last quarter. Bankers and analysts have said that business was affected by weak volumes in the final quarter as nervous investors stayed out of markets. JPMorgan’s revenues in the division were worse than expected, however. “Forget trading – trading goes up, trading goes down. The start of the year’s been good but it’s eight days,” Mr Dimon said. He dismissed the idea that the business was suffering the impact of new regulations. “There’s no part of the investment bank that is naturally stable,” he said. “It’s not a mystical thing – it will come back. I don’t think that the lower numbers are permanent. When things come back the numbers will boom again. And it won’t be because we’re geniuses. It will be because we stayed in the game.”

Overall, the bank reported net revenue of $22.2bn, down from $26.7bn in the fourth quarter of 2010. While the investment bank, which includes the trading division, suffered the steepest decline – from $6.2bn to $4.4bn – the retail division was also down from $7.7bn to $6.4bn.

In the earnings statement, Mr Dimon said the results, which included a record $19bn net income on a full-year basis, were “reasonable given the environment, although the return for the fourth quarter was modestly disappointing”.

Among the downdrafts on the retail business was the new regulation that caps debit card fees, which the bank said drove a 6 per cent decline in non-interest revenue in consumer and business banking. Mr Dimon called the cap a “gross miscarriage of justice”. In a worrying sign for investors in Bank of America, which is struggling with huge mortgage-related losses, JPMorgan reported an increase in “repurchase” losses, whereby the buyer of mortgages demands compensation when a homeowner fails to repay. In another large standout item, JPMorgan booked a $528m charge, adding to reserves for litigation, mainly related to mortgages.

The bank reported $390m in repurchase losses, compared with $349m a year ago, which it said was primarily the result of “an acceleration” of demands from Fannie Mae and Freddie Mac, the government-backed mortgage groups. Mr Dimon said he was more concerned with broader government housing policy, which was “absolutely contradictory” to encouraging a resurgence in home loans. An accounting treatment that forces banks to book a gain when the value of their own debt falls and a loss when credit spreads tighten again came into play in the fourth quarter. The rule was heavily criticised three months ago for distorting third-quarter earnings when it provided multibillion dollar boosts to results. This time, with the value of JPMorgan’s debt rising, the company booked a $567m pre-tax loss from the so-called debt valuation adjustment.