JPMorgan Chase & Co. reported its first quarterly loss under Chief Executive Officer Jamie Dimon after taking a $7.2 billion charge for legal expenses.
The third-quarter loss was $380 million, or 17 cents a share, compared with a profit of $5.71 billion, or $1.40, in the same period a year earlier, the New York-based company said today in a statement. Earnings adjusted for one-time items were $1.42 a share. The average of 20 analysts surveyed by Bloomberg was $1.30.
Dimon, 57, who led JPMorgan to record earnings in each of the past three years, is grappling with regulatory investigations as the bank works to tighten internal controls following its more than $6.2 billion trading loss last year. Concern that the Federal Reserve would begin paring back its bond-purchase program fueled a rise in long-term interest rates and curtailed equity and bond trading as well as mortgage business for U.S. banks.
"This quarter is probably going to be the most challenging quarter the banks are going to have since they began their recovery over two years ago," Marty Mosby, an analyst with Guggenheim Securities in New York, said in a Sept. 30 interview. Interest rates that rose "shockingly high" damped trading results and "paralyzed" home lending, which had been gaining momentum in the first half of the year, he said.
Chief Financial Officer Marianne Lake told investors Sept. 9 that JPMorgan's third-quarter revenue from stock and bond trading may decline as much as 5 percent from a year earlier, when it produced $4.77 billion.
Ten-year Treasury yields, which are used to set rates for some consumer and corporate loans, rose from this year's low of 1.63 percent on May 2 to 3 percent on Sept. 5.
Rising rates reduce the value of banks' bond holdings and cut mortgage-fee revenue for home lenders such as JPMorgan and Wells Fargo & Co., which is scheduled to report earnings at 8 a.m. New York time.
Refinancings, which accounted for 76 percent of last year's $1.75 trillion in loan originations, slumped after rates on 30-year loans jumped from historical lows of less than 3.5 percent earlier this year to an average of 4.32 percent at the end of September, data compiled by Freddie Mac show. Mortgage volumes were estimated to have fallen 25 percent from $494 billion in the second quarter to $369 billion in the third, according to data from the Mortgage Bankers Association, a Washington-based trade group.
JPMorgan said on Aug. 7 that its mortgage-bond sales practices were under criminal investigation by U.S. prosecutors in California. The company has been discussing a potential $11 billion deal with state and federal authorities to settle that case as well as other related investigations, a person with knowledge of the talks said last month.
The firm is also facing an investigation of its hiring practices in Asia and a criminal inquiry into its energy trading business.
"These things tend to snowball," Christopher Wolfe, a senior bank credit analyst at Fitch Ratings in New York, said in an interview prior to the earnings statement. "Once you get in trouble with your regulators, they are going to keep looking for other things."
Mounting fines and other sanctions are eroding JPMorgan's profit for the year and placing the firm's $6 billion share-repurchase program at risk, Charles Peabody, an analyst at Portales Partners LLC, wrote in a Sept. 25 note to investors. He cut his 2013 earnings estimate 12.5 percent to $4.90 a share.
"Both the materiality of the potential litigation charges and the potential suspension of the share-repurchase program could have a significant impact" on the bank's stock, Peabody wrote.
The company agreed on Sept. 19 to pay about $1.3 billion to resolve U.S. and U.K. investigations into a record trading loss in 2012 and to settle unrelated claims it unfairly charged customers for credit-monitoring products.
Two former employees were indicted Sept. 16 on charges including securities fraud and conspiracy in connection with the trading loss on credit derivatives that exceeded $6.2 billion last year. Bruno Iksil, who built the position and came to be known as the London Whale because of the size of the bets, is cooperating in the investigation and hasn't been charged, prosecutors said.
Dimon survived a shareholder vote in May recommending the board split his dual duties as chairman and CEO. He said the bank will fight "till the end" anyone who sues the company claiming they were misled over the London losses at the chief investment office.
The CEO stepped down as chairman of JPMorgan's main operating subsidiary July 1, according to a person briefed on the matter. JPMorgan has sought to bolster corporate governance and rebuild its relationship with supervisors after U.S. regulators and a Senate panel faulted the firm for withholding information during the trading losses last year.
Dimon, who is still chairman of the parent corporation, handed off the title at the subsidiary because company attorneys recommended it for technical reasons, rather than because of pressure from regulators or investors, said the person.
The board cut Dimon's pay in half for 2012 after concluding that he bore some responsibility for the trading loss. It also credited his leadership for the lender's performance. JPMorgan reported a third straight year of record profit in 2012 with $21.3 billion of net income.
The investigations are "a concerted effort to convince Jamie Dimon that he needs to be much more accepting of regulatory suggestions," Mosby said. Dimon, who has railed against excessive regulation and once publicly challenged Fed Chairman Ben S. Bernanke on new bank rules, needs to "work with regulators instead of fight with regulators," Mosby said.