J.P. Morgan's Earnings Climb, Boosted by Trading -- 4th Update

By Peter Rudegeair 

J.P. Morgan Chase & Co. posted a 17% rise in first-quarter profit that was driven by a continued rebound in areas such as bond trading, while lending margins expanded as rates recently ticked up.

The results from the nation's largest bank by assets showed that while hoped-for benefits the Trump administration would bring to financial firms have yet to be realized, many of banks' bread-and-butter businesses were performing well. Shares in J.P. Morgan climbed 0.5% to $85.85 in morning trading.

The lack of progress on loosening financial regulations, reforming the tax code and other policies that are high priorities for businesses hasn't alarmed J.P. Morgan executives. They said they expect such pro-growth policies to eventually lead to increased spending and borrowing.

"You all should expect as a given that when you have a new president and they get going... it's going to be a sausage-making period," Chief Executive James Dimon said on a conference call with analysts. "To expect it to be smooth sailing--that would just be silly."

And J.P. Morgan showed that it isn't dependent on Washington. The bank reported a first-quarter profit of $6.45 billion, or $1.65 a share, versus $5.52 billion, or $1.35 a share, a year earlier. Analysts polled by Thomson Reuters had expected earnings of $1.52 a share.

The bank's return on equity, a key measure of profitability, was 11% in the first quarter compared with 9% a year ago. This marked the fourth consecutive quarter in which the bank's return was at or above the 10% level, which is considered its theoretical cost of capital.

J.P. Morgan got a boost from still low -- but rising -- interest rates. Net interest income rose 6% to $12.06 billion in the first quarter. That helped reverse pressure on the bank's net interest margin, a measure of how profitably it lends and invests its customers' deposits. This rose to 2.33% in the first quarter, low by historic standards but up 0.11 percentage points from the fourth quarter.

That helped offset a slowdown in the volume of loans the bank generated at the start of the year. Total loans of $896 billion were flat on the fourth quarter of 2016. Chief Financial Officer Marianne Lake said the lending data was affected by noise from the financing of large acquisitions in earlier periods as well as a decision by large companies to fund their operations by issuing bonds as opposed to taking out loans.

Trading was a brighter spot. Revenue from trading bonds, stocks and currencies, among other things, increased 13% to $5.82 billion from $5.17 billion in the first quarter of 2016.

Fixed-income trading revenue climbed 17% thanks in part to higher activity in trading government bonds and other securities closely tied to interest rates in advance of elections in Europe. Equities trading revenue edged up 1.9%.

Overall, adjusted revenue rose 6.2% to $25.59 billion. Analysts had expected $24.88 billion.

Costs increased 8.5% to $15.02 billion from $13.84 billion a year earlier, due in part to a bump in compensation costs in J.P. Morgan's investment bank. In February executives told investors to expect a rise in expenses this year to fund investments and growth.

J.P. Morgan set aside $1.32 billion in the first quarter to cover loans that could potentially turn bad in the future. That compares with $1.82 billion in the first quarter of 2016 and $864 million in the fourth quarter of 2016.

The improving outlook for oil and gas companies led J.P. Morgan to release $133 million in business-loan reserves. A writedown in its student-loan portfolio and higher expected defaults on credit cards prompted a $380 million addition to its consumer-loan reserves.

The bank lost $1.65 billion to loan defaults, or 0.79% of its overall portfolio, compared with a 0.6% charge-off rate in the fourth quarter of 2016. For all of 2017, the bank expects net charge-offs to be about $5 billion.

J.P. Morgan used the strength and breadth of its results as a retort to renewed talk of the need to split the businesses of big banks. A Trump administration official recently suggested the government could be open to re-instituting rules around a separation of bank businesses.

In response to questions about this, Ms. Lake said the diversity of J.P. Morgan's businesses was a source of strength for the company and for financial markets during the financial crisis. She added that a separation of those activities "doesn't feel consistent with the rest of the objectives of the administration" and "feels unnecessary" given the amount of capital and liquidity the banking industry has added in recent years.

Write to Peter Rudegeair at [e-mail]

(END) Dow Jones Newswires

April 13, 2017 12:08 ET (16:08 GMT)

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