JPMorgan Chase Earns $1.01 Per Share

My earnings-dar has been fairly well-adjusted this week. For Intel, I said “I expect 50 or 51 cents, maybe 52 cents.” Intel earned 52 cents per share.

I also wrote, “The stock that I think is a good candidate for an earnings beat is JPMorgan Chase (JPM).” This morning, JPM reported Q3 earnings of $1.01 per share. Wall Street was expecting 90 cents per share.

I have to explain something about how banks report their earnings because it’s a tricky topic. When a bank reports its earnings, it needs to estimate now how many of its loans will turn out to be bum loans down the road.

Obviously, a bank hopes all of its loans will be repaid, but we know that a small amount will disappear into the ether. But how many? That’s not so easy to say. If the bank thought the loan would go bust, they never would have made it in the first place. But for sake of accounting, they need to set aside some money for their bum loans.

This means that the bank’s estimate of its future bad loans has a major impact in the here and now in the form of its current earnings. The whole thing is based on a guess, really. It can be a good guess or it can be a bad guess, but it’s only a guess.

So whenever a bank releases its earnings report, there’s always a debate about the quality of its earnings versus the quantity of its earnings. “Sure,” the bears grumble, “that’s what they tell us they earned, but the bank is living in La-La Land if they think those forecasts will hold.” Sometimes they’re right (see ZeroHedge for a critical look at JPM’s earnings). However, banks have no incentive to lie or mislead investors about their bad loans. It will only come back to bite them in the end.

Our own Nicholas Financial (NICK) is a good example of the opposite. They overestimated their bad loans and for the past few quarters had to play catch up with their loan reserves. This made it appear that earnings were improving more rapidly then they were. (This was a very small effect though.) Your guess is never going to be 100% spot-on so you always need to make adjustments.

Now back to JPMorgan Chase. Here’s the WSJ:

The nation’s second largest bank by assets reported $300 billion in new and renewed credit and capital raises in the quarter, and it said consumers spent more on their credit cards. But consumers and businesses continue to pay off loans faster than the bank makes new ones, and Wall Street’s wobble over the summer reduced revenue and profits from the securities business.

Still, J.P. Morgan’s $4.4 billion in third-quarter profits, $1.01 per share, topped analysts’ estimates, as the amount of money it set aside for loans that might go bad continued to tumbled. The bank also continued to report a declining defaults across most of its loan books.

Revenue on a managed basis, which excludes the impact of credit-card securitizations and is on a tax-equivalent basis, dropped 15% to $24.34 billion.

The bank did expand; assets increased 5% from a year ago to $2.1 trillion, mainly because it added securities to its investment portfolio.

J.P. Morgan’s shares rose 1% to $40.80 premarket amid broad market strength, pulling along rising shares of its main big bank rivals Bank of America Corp. and Wells Fargo & Co. As of Tuesday’s close, the stock had fallen 12% the past year.

The profit “was the result of the good underlying performance of our businesses,” Chairman and Chief Executive James Dimon said in a press release.

He noted that the investment banking’s results were “solid” and its Main Street operations saw “strong” mortgage loan production.

Still, the investment-banking arm saw profit drop by one-third as revenue slid 29%. Profit soared to $907 million from $7 million a year earlier on sharply lower credit-loss provisions at its retail financial-services segment as revenue declined 7%.

The first big bank reporting results, J.P. Morgan’s bottom-line had been solidly tied to its Wall Street-related operations recently, but growth shifted toward the giant bank’s Main Street operations in the second quarter as the economy continued healing. Investment-banking results have turned sour in recent quarters amid a steep decline in trading activity.

The bank also has benefited recently from a sharp cut in its loan-loss reserves. Managed credit-loss provisions were $3.22 billion, down from $9.8 billion a year earlier and $3.36 billion in the prior quarter.

Analysts polled by Thomson Reuters had forecast earnings of 90 cents a share on $24.64 billion in revenue.

Posted by on October 13th, 2010 at 9:01 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.