JPMorgan Chase & Co., the largest U.S. bank by assets, said first-quarter profit rose 33 percent, beating analysts' estimates as record low interest rates fueled mortgage-revenue gains.
First-quarter net income climbed to $6.53 billion, or $1.59 a share, from $4.92 billion, or $1.19, in the same period a year earlier, the New York-based company said today in a statement. Twenty-eight analysts surveyed by Bloomberg estimated earnings per share of $1.39 adjusted for a one-time accounting item.
U.S. lenders extended $482 billion in mortgages in the first quarter, up 29 percent from a year earlier, as government refinancing incentives and record low borrowing costs propelled demand for loans, according to estimates from the Mortgage Bankers Association. To stimulate economic growth, the Federal Reserve has kept its benchmark interest rate near zero since December 2008, and is buying $85 billion a month in bonds to push down long-term rates.
"Rates continue to be low, there are still a lot of people who haven't" refinanced yet, Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and analyst at FBR Capital Markets in Arlington, Virginia, said in an interview yesterday. Mortgage banking is "not going to be as strong as last year, but volumes in the first quarter are much stronger than anybody anticipated," he said.
After three straight years of posting record net income, Chief Executive Officer Jamie Dimon, 57, is cutting expenses, responding to sluggish global growth and low interest rates that compress profit margins on lending and yields on investments. JPMorgan is eliminating as many as 19,000 jobs in its mortgage and community-banking divisions through 2014, the company said in February.
The bank, which employed about 259,000 people at the end of December, will cut 13,000 to 15,000 jobs in its mortgage unit and 3,000 to 4,000 in community banking excluding home lending through the end of next year. The total will shrink by about 4,000 people this year, the bank said.
Lending at U.S. banks was little changed at 7.2 trillion from the fourth to the first quarter, according to Fed data. Demand for loans was flat even as the U.S. unemployment rate fell during all three months of the period, dropping to 7.6 percent in March.
An improvement in credit quality may reduce banks' ability to generate profits from releasing reserves set aside for loan losses. About $5.68 billion of JPMorgan's profit in 2012 came from reserve releases as fewer consumers defaulted on their payments.
JPMorgan posted record profit last year even after its worst trading loss ever, a wrong-way bet on credit derivatives that generated at least $6.2 billion of losses in the first nine months of 2012.
Under regulatory orders to tighten internal controls following the loss, JPMorgan will face more sanctions in the coming months, Dimon told shareholders in a letter released April 10.
The bet on credit derivatives was "extremely embarrassing, opened us up to severe criticism, damaged our reputation and resulted in litigation and investigations that are still ongoing," Dimon said in the letter. "We received regulatory orders requiring improved performance in multiple areas, including mortgage foreclosures, anti-money laundering procedures and others. Unfortunately, we expect we will have more of these."
The Fed and Office of the Comptroller of the Currency took the first regulatory actions against the bank for the trade in January, ordering it to strengthen risk controls and enhance executive pay practices. The board of directors was also directed to take into consideration control weaknesses and "adverse risk outcomes" in compensation awards for Dimon and other top managers.
Directors urged investors in March to vote against a shareholder proposal that would strip Dimon of his chairman title. They said the current structure remains the "most effective leadership model" for JPMorgan. A similar proposal last year failed with 40 percent of the vote.
The CEO may leave the bank if he's forced to relinquish the chairmanship, said Charles Peabody, an analyst with Portales Partners LLC. Dimon told investors in February that he wouldn't have agreed to take a previous job, leading Bank One Corp., if the board hadn't given him both roles, Peabody said. JPMorgan acquired Bank One in 2004.
If Dimon leaves, "shareholders may just find that the stock loses its premium valuation," wrote Peabody, whose firm predicts JPMorgan will underperform the Standard & Poor's 500 Financials Index in the next 12 months.
The board cut Dimon's pay in half for 2012 after concluding that he bore some responsibility for the trading loss.