JPMorgan Chase & Co.'s first-quarter results showed that it continues to fare well relative to its peers during a rough credit cycle.
If James Dimon is correct, the point where JPMorgan's peers start seeing better results themselves may not be so far off.
In comments after the company reported results, Mr. Dimon said that, though the extent of the economic downturn is "impossible to predict," he believes an end to the credit turmoil is in sight. "On the financial-condition side … I do think we are well through more than half of that, maybe 75% to 80%," he said. "Capital has been raised, a lot of losses have been taken — maybe not all, but a lot."
As expected, JPMorgan's results were hurt by deteriorating credit, particularly home equity lines, and the $1.6 trillion-asset company wrote off $2.6 billion during the quarter after marking down leveraged loans and mortgages.
But Mr. Dimon, who struck the March deal that brought it Bear Stearns Cos., said he remains interested in expanding operations and increasing assets.
"I don't think we are glum at all" about the quarterly results, Mr. Dimon said during a media call early Wednesday, after the company reported its profit fell 50%, to $2.4 billion. Per-share earnings of 68 cents beat analysts' average estimate by 4 cents, though only one business line — treasury and securities services — posted higher year-over-year earnings and its retail and investment banking units reported losses.
In a brief update on the Bear Stearns deal, Mr. Dimon said he is more upbeat about the businesses the deal would bring to JPMorgan Chase than the risk his company would assume. "We really worried much more about the downside than the upside" when the deal was announced four weeks ago, he said. But now JPMorgan Chase sees "a lot of good things there," including prime brokerage, commodities, fixed-income, and mortgage businesses, he said. The company has imposed a hiring freeze in its New York investment banking unit to give Bear Stearns employees opportunities to apply for open positions — thereby limiting potential layoffs. "We are treating it as a real merger," he said. "We're trying to get the best people." JPMorgan Chase expects to close the deal by June 30.
Its investment banking unit and all of the five other business lines experienced revenue declines in the quarter, compared to the fourth quarter. Only the commercial banking arm reported a small increase in net income. Its retail and investment banking units swung to losses of $227 million and $87 million, respectively. Net income from credit cards fell 20%, to $609 million, and asset management profit declined 16%, to $356 million. Net income from commercial banking fell 4% from a year earlier, to $292 million. However, profit in its treasury and securities services unit rose 53%, to $4.3 million. JPMorgan said total revenue fell 11% from a year earlier and 3% from the fourth quarter, to $17 billion. Profit slid 20% from the fourth quarter.
Meanwhile, overall credit costs — chargeoffs and the addition to the loan-loss reserve — more than tripled from a year earlier, to $5.1 billion. Almost half of the $2.5 billion increase in the loan-loss reserve was tied to home equity lending. This portfolio has been JPMorgan Chase's most disappointing, and it keeps getting worse, Mr. Dimon said. Residential housing development loans and prime mortgage portfolios also deteriorated last quarter, prompting the company to further tighten its underwriting standards.
Chief financial officer Michael Cavanagh told analysts during the company's conference call, "At this stage in subprime [mortgages], the tightening that we've done left us with almost no subprime production in the month of March."
Despite lingering credit issues, Mr. Dimon was defiant in asserting that JPMorgan Chase's underlying business trends are healthy and will remain so. "We want to grow for decades, not flip and flop every time the economy sneezes," he said during the investor call.
Mr. Dimon also said that JPMorgan Chase is open to more acquisitions. Asked during the investor call to confirm reports that JPMorgan Chase had looked into buying Washington Mutual Inc., he said: "You should assume we look at everything."
During the media call, Mr. Cavanagh also gave the nod to capital that has become customary in presentations by JPMorgan Chase executives. "The headline of the press release is the key point," he said, referring to the mention of the company's $86.6 billion of Tier 1 capital, giving it a ratio of 8.3%. Asked how the company plans to deploy excess capital, he said, "There is a drying up capital market; that is a great opportunity" in commercial lending.
Sean Jones, an analyst with Moody's Investors Service, noted in a research report Wednesday that JPMorgan Chase's residential exposure is "its major credit problem."
Added Mr. Jones: "The need for higher provisions will likely deflate earnings and that's why we get so much comfort from its strong capital position."
