J.P. Morgan Drops On Q2 Earnings, One-Time Items Boost EPS, Revenues Miss, Fortress Dimon Reinforced (JPM)

J.P. Morgan Chase JPM reported second quarter earnings that, when adjusted for several accounting items, was in line with economist estimates. However, revenues were weaker than expected and the stock fell in pre-market trade.

Second Quarter Highlight

For the second quarter of 2013, the banking giant reported earnings per share of $1.45, in line with estimates and showing a marked improvement from the $1.15 earned in the same quarter a year ago. Earnings per share were reported at $1.60 but adjusting for one-time items including $0.24 in benefits from reduced loan-loss reserves and a $0.09 charge due to a legal settlement, the comparable figure is lower at $1.45.

However, the $1.60 figure was excluding an approximately $0.095 per share boost due to the debt valuation adjustment (DVA). DVA allows banks to account for the fair value of their liabilities outstanding, and since bonds sold off in the quarter and J.P. Morgan can buy back its bonds at a lower price, it is allowed to recognize this difference as a gain known as the DVA under GAAP accounting.

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Jamie Dimon, Chairman and Chief Executive Officer, commented on the financial results: “Our earnings reflected strong performance across our businesses. We maintained our #1 ranking in global Investment Banking fees. Consumer deposits were up 10% compared with the prior year and Credit Card sales volumes were a record $105.2 billion, up 10%."

On the top-line, revenues were weaker than expected in the quarter as the company reported revenues of $25.12 billion vs. the consensus forecast of $25.73 billion. Revenues rose from the same period a year ago when the company reported earnings of $22.18 billion.

"Asset Management had $25 billion of net long-term client flows, the seventeenth consecutive quarter of positive net long-term client flows," continued Dimon. "Net charge-offs remain near historical lows in our Credit Card business, have dropped to less than half of what they were a year ago for our Real Estate Portfolios and remained very low in our wholesale portfolios. In light of these trends, we reduced the allowance for loan losses in Consumer & Community Banking in the second quarter by a total of $1.5 billion."

"Loan growth across the industry continued to be soft, reflecting a cautious stance by consumers, many small businesses and corporations. However, we continue to see broad-based signs that the U.S. economy is improving and we are hopeful that, as jobs are added and confidence builds, the U.S. economy will strengthen over time.”

Fortress Dimon Reinforced

J.P. Morgan's so-called fortress balance sheet, colloquially known as Fortress Dimon, was bolstered in the quarter as the company reported a Basel I Tier 1 Common Equity Ratio of 10.7 percent and estimated a Basel III Tier 1 Ratio of 9.3 percent, including the effects of the draconian rules announced on July 2.

“This quarter, we exceeded the proposed Basel III Liquidity Coverage Ratio requirement – as of the end of the second quarter, our estimated ratio was 118% – and we are committed to achieving a Basel III Tier 1 common ratio1 of 9.5% by the end of this year," said Dimon. "We estimate that our Basel III Tier 1 common ratio1, reflecting the final rules approved by the Federal Reserve on July 2, 2013, was approximately 9.3% at the end of the second quarter, including the reduction of the value of our investment securities that are available for sale because of higher long-term interest rates.”

Dimon added: “While we have put extensive focus on our control agenda, we have continued to serve our clients and communities around the world. During the first six months of the year we raised capital and provided credit totaling $1.0 trillion for our clients, from individuals to large multinational corporations."

"Regarding our control agenda, we have taken some of our best people, given them enormous resources and tasked them with ensuring that our systems, practices, controls and technology meet the highest standards. We are confident that these investments will pay off and we will be a better company for it.”

I am proud of this Company and what our employees do every day to serve our clients, customers and communities in over a hundred countries.”

Shares Volatile

J.P. Morgan shares were volatile in pre-market trade having popped on the reported strong EPS number only to sell-off as the market digested the impact of several items. Shares initially rose to $56.00 before declining to $54.30 and settling near $55.08, down only 0.07 percent from Thursday's close.