JPMorgan: Beats expectations despite writedowns

JPMorgan Chase moved up its earnings announcement to today in order to surprise the market with better than expected earnings.  The company reported full-year income of $5.6 billion and 4th-quarter income of $702 million or $0.07 a share, beating consensus estimates of $0.01 a share.  You should note, these numbers do not include the estimated $31.2 billion of writedowns (later increased to $32.5 billion) associated with the Washington Mutual transaction. But, folks, for banks, this is as good as it gets.

Before I get to the heart of things, I do want to caution that WaMu recorded tens of billions in writedowns to their asset base in being acquired by JPMorgan Chase.  Those are not reflected in these results (as they were apparently taken by Washington Mutual just before the acquisition). During the WaMu takeover announcement on September 25th, the JPMorgan Chase management were very specific in detailing the extremely cautious estimates they made in writing down WaMu assets.  What we are now seeing is probably only JPMorgan Chase credit exposure. (UPDATE:  Deal Book has a good piece on the Bear Stearns and WaMu exposure.  The long and short is Bear probably cost JPMorgan this quarter, whereas WaMu may oly cost them down the line.  See story here.)

As to the earnings, they are very good, considering the environment we are in.  Here are the highlights:

  • $4.1 billion (pretax) increase to loan loss reserves, resulting in coverage ratios of 4.24%1 for consumer businesses and 2.64% for wholesale businesses
  • $2.9 billion (pretax) net markdowns due to leveraged lending exposures and mortgage-related positions in the Investment Bank
  • $1.1 billion (after tax) benefit from merger-related items
  • $854 million (after tax) benefit from MSR risk management results
  • $680 million (after tax) private equity write-downs
  • $627 million (after tax) gain due to dissolution of Paymentech joint venture

JPMorgan’s Tier 1 capital ratio came in at 10.8% and their total capital ratio came in at 14.7%. Their leverage was 16 times ($134 billion of capital on $2.1 trillion of assets).  You should note here that JPMorgan’s 3rd Quarter 10-Q shows assets of $2.25 trillion on equity of $137.7 billion, so we have witnessed a mild deleveraging and asset shedding here.

In the areas of greatest stress: leveraged loans and credit cards, there was considerable weakness. Their investment banking division lost $2.36 billion. That compares to a profit of $124 million last year. In credit cards, they lost $371 million. That compares to a profit of $609 million last year. Both of these numbers are tolerable – although I would expect them to worsen over 2009.

Otherwise, divisions made money across the board: Commercial Banking, Treasury and Security Services, Asset Management, and Private Equity (due to an extraordinary gain).

The bottom line: this is a very good report. However, going forward, I would expect greater credit card, leveraged loan and private equity losses. In comparison to other firms announcing later, one should expect JPMorgan’s earnings report to be the gold standard.

JPMorgan Chase Acquires the Deposits, Assets and Certain Liabilities of Washington Mutual’s Banking Operations – JPMorgan Chase Website
JPMorgan Chase Reports Full-Year 2008 Net Income of $5.6 Billion, or $1.37 per Share, on Revenue of $67.3 Billion; Fourth-Quarter 2008 Net Income of $702 Million, or $0.07 per Share – JPMorgan Chase Website
JPMorgan Profit Drops 76 Percent on $2.9 Billion of Writedowns –
JPMorgan Chase 2008 3rd Quarter 10-Q – filed 7 Nov 2008

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