(JPM) JPMorgan Chase & Company Returns to Form

After profit declines for two straight quarters, JPMorgan Chase & Company (JPM) reported first quarter earnings per share of $1.31, topping the Zacks Consensus Estimate of $1.17. This also compares favorably with $1.28 earned in the prior-year quarter. That’s more like the JPMorgan we have always known.

JPMorgan’s better-than-expected earnings signals good going by the sector as it has exposure in almost all banking businesses. Marked recovery of the bond and equity market and consequent revenue growth, which helped JPMorgan to bounce back, should lift the results of other mega-banks during the quarter.

JPMorgan’s earnings per share for the reported quarter included certain significant nonrecurring items, such as after-tax benefit from reduced loan loss reserves of 28 cents per share, after-tax benefit from the Washington Mutual bankruptcy settlement of 17 cents, after-tax expense for additional litigation reserves of 39 cents and after-tax loss from debit valuation adjustment (DVA) in the Investment Bank of 14 cents. Excluding these items, JPMorgan’s earnings came in at $1.39 per share.

Results for the reported quarter were primarily benefited by improved revenue and slowdown in provision for credit losses, which more than offset higher non-interest expense. Almost all the sectors except Corporate/Private Equity performed well to result in such impressive earnings during the quarter.

Investment banking results witnessed a drastic deterioration from the prior-year quarter due to lower revenue and lower benefit from the provision for credit losses. However, the results were much better than the prior quarter due to improved market conditions. However, with a healthy market share, the segment maintained its #1 rank in Global Investment Banking Fees.

Retail Financial Services and Commercial Banking divisions demonstrated good underlying performances, with improved revenue and earnings. However, despite positive credit trends for credit card portfolios and an expansion in credit card sales volume, the overall performance of the Card business was not very impressive. Treasury & Securities Services reported higher deposit balances during the quarter and performed better than the prior and prior-year quarters.

Quarter in Detail

Managed net revenue of $27.4 billion in the quarter was up 6% from the year-ago quarter. The figure also compares favorably with the Zacks Consensus Estimate of $24.4 billion.

Managed non-interest revenue increased 13% from the year-ago period to $15.6 billion. The increase was a result of higher mortgage fees and related income, and a benefit from the Washington Mutual bankruptcy settlement, partially offset by lower principal transaction revenue. However, net interest income was down 2% from the year-ago quarter at $11.8 billion.

Non-interest expenses were $18.3 billion, up 15% from the year-ago quarter. The increase was primarily due to higher compensation and non-compensation expenses.

Managed provision for credit losses decreased 38% from the year-ago quarter to $726 million. Total consumer provision for credit losses was $637 million, down 31% from $918 million in the year-ago quarter. This reflects improved delinquency trends across most consumer portfolios compared with the prior-year quarter.

Credit Quality

JPMorgan’s credit quality showed a decent improvement during the quarter. As of March 31, 2012, nonperforming assets were $11.7 billion, slightly up from $11.0 billion in the prior quarter but down from $15.0 billion in the prior-year quarter.

Consumer net charge-offs decreased to $2.4 billion from $3.6 billion in the prior-year quarter. As a result, the consumer net charge-off rate improved to 2.60% from 3.77% a year ago.

Capital Position

JPMorgan maintained a strong capital position with Basel I Tier 1 common ratio of 10.4% as of March 31, 2012, up from 10.1% as of December 31, 2011 and 10.0% as of March 31, 2011. The estimated Basel III Tier 1 common ratio was approximately 8.4% as of March 31, 2012.

Book value per common share was $47.60 as of March 31, 2012, compared with $46.59 as of December 31, 2011 and $43.34 as of March 31, 2011.

Our Viewpoint

JPMorgan was not able to deliver impressive results in the last two quarters of 2011 as it buckled under the weakness in the wider economy and the fundamental pressures on the sector, but it overcame its shortcomings with the help of gradually improving macroeconomic elements, such as rising consumer spending and higher employment.

However, JPMorgan has been fighting poor capital market revenues, low liquidity and a tough regulatory environment, which might mar its results in the upcoming quarters. On the other hand, reduction in reserves for future losses, gradually improving retail banking performance and steady credit trends in its credit card business are expected to be on the positive side going forward.

Most importantly, despite the macro pressure on credit quality, JPMorgan’s credit metrics have been steadily improving since the final quarter of 2009. Though provisions continued to reflect elevated losses in the mortgage and home equity portfolios, we are impressed to see a modest improvement in delinquency trends and net charge-offs. We expect credit quality to continue improving, thereby providing more room for bottom-line improvement.

Though there are concerns related to its exposure to the European economy, equity-centric activities in the U.S. are expected to support JPMorgan’s results in the upcoming quarters with continued recovery in the capital markets.

Yet net interest income remains under pressure, affecting the traditional banking businesses. Also, with the thrust of new banking regulations, there will be pressure on fees, and loan growth could remain feeble.

In Conclusion

An investor with an appetite to absorb risks related to market volatility should not be disappointed with an investment in JPMorgan over the long haul. Though the stock is not trading for less than what it is worth, JPMorgan’s fundamentals remain highly promising with a diverse business model and a strong balance sheet.

Also, from the risk perspective, as JPMorgan cleared the most difficult stress test, it is for sure that the company would be able to withstand another financial crisis.

Moreover, one can consider a company like JPMorgan as value investment due to its steady dividend-yielding nature. The company announced a 20% increase in its quarterly dividend to 30 cents per share. This is the second time that JPMorgan hiked its dividend since the financial crisis. Prior to this, the company had increased its quarterly dividend five-fold to 25 cents in March 2011.

JPMorgan shares maintain a Zacks #2 Rank, which translates into a short-term Buy rating. However, we maintain a long-term Neutral recommendation on the stock.

Following the announcement of first quarter results, the stock was up about 0.25% in before-market trade.

As JPMorgan is a banking giant with exposure in almost all banking businesses and is one of the first two important bankers to kick start first quarter results, its results are going to be a significant indicator of performances in the key banking sector. Wells Fargo & Company (WFC) has advanced its earnings release date this quarter by about a week and reported on the same day with JPMorgan.

Close on the heels of JPMorgan and Wells Fargo, the other major banks, namely Citigroup Inc. (C) is scheduled to report on April 16, Goldman Sachs Group Inc. (GS) on April 17, and Bank of America Corporation (BAC) and Morgan Stanley (MS) on April 19.

BANK OF AMER CP (BAC): Free Stock Analysis Report

CITIGROUP INC (C): Free Stock Analysis Report

GOLDMAN SACHS (GS): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

MORGAN STANLEY (MS): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

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