JPMorgan Results Bring Optimism - Analyst Blog - Citigroup (NYSE:C), Goldman Sachs Gr (NYSE:GS)

JPMorgan Chase & Company's (JPM) fourth quarter earnings came in at $1.12 per share, substantially ahead of the Zacks Consensus Estimate of $1.00. Results also soared from the earnings of 74 cents in the prior-year quarter. For full year 2010, earnings increased to $3.96 per share from $2.26 in 2009. This also surpassed the Zacks Consensus Estimate of $3.85.

The better-than-expected numbers were primarily supported by higher non-interest revenue and a slowdown in provision for credit losses, which more than offset a rise in non-interest expense primarily as a result of increased litigation reserves.

As expected, investment banking witnessed an improvement over the prior quarter with better revenue and client flows. Most of JPMorgan's businesses performed well owing to its continued strategic investments. Strong credit trends in credit card and wholesale businesses as well as strong net inflows in long-term products of its Asset Management business were also impressive during the quarter.

Quarter in Detail

Net income available to common shareholders was $4.8 billion, up 47% from $3.3 billion in the prior-year quarter. A significantly lower provision for credit losses and higher revenue primarily inspired the increase. However, higher non-interest expenses and lower interest income were the offsetting factors. For the full year, net income increased 48% year over year to $17.4 billion.

Managed net revenue for the quarter came in at $26.7 billion, up 6% from $25.2 billion in the year-ago quarter. This also compares favorably with the Zacks Consensus Estimate of $24.2 billion. For the full year, managed net revenue was $104.8 billion, down 4% from $108.6 billion in 2009. However, this compares positively with the Zacks Consensus Estimate of $101.5 billion.

Managed non-interest revenues for the quarter increased 34% year over year to $14.5 billion. The increase was driven by improved principal transactions' revenue and higher mortgage fees. However, net interest income decreased 15% year over year to $12.2 billion. The decline was primarily due to lower loan and securities balances.

Non-interest expenses for the quarter were $16.0 billion, up 34% from $12.0 billion in the prior-year quarter. The increase was driven primarily by higher litigation expenses.

Managed provision for credit losses decreased 66% year over year to $3.0 billion. Total consumer provision for credit losses was $3.1 billion, down 64% from $8.5 billion in the year-ago quarter. This reflects a reduction in the allowance for credit losses as a result of improved delinquency trends and lower estimated losses.

Credit Quality

JPMorgan's credit quality showed decent improvement during the quarter. As of December 31, 2010, nonperforming assets were $16.6 billion, down from $17.7 billion in the prior quarter and $19.7 billion in the prior-year quarter. Consumer net charge-offs decreased to $4.8 billion from $6.6 billion in the prior-year quarter.

As a result, the consumer net charge-off rate improved to 4.89% from 6.05% in the year-ago quarter. Also, wholesale net charge-offs substantially decreased to $271 million from $1.2 billion a year ago. As a result, wholesale net charge-off rate improved to 0.49% from 2.31% a year earlier.

Capital Position

JPMorgan maintained a strong capital position with an estimated Tier 1 common capital ratio of 9.8% as of December 31, 2010, up from 9.5% on September 30, 2010, and 8.8% on December 31, 2009.

Book value per common share was $43.04 as of December 31, 2010, compared with $42.29 as of September 30, 2010, and $39.88 as of December 31, 2009.

JPMorgan: A Sound Investment?

The primary source of JPMorgan's earnings stability in the ongoing economic recovery is its business diversification. The spread of its portfolio may prove to be as much of a positive during the recovery as it was during the downturn. Within traditional banking, a diversified product portfolio has better chances of sustaining than many other banks, which have exited some of these areas.

Though concerns relating to the impact of regulatory changes and slothful customer trading in fixed income, currencies and commodities are anticipated to be a drag on the financials, improvement in equity markets and a reduction in reserves for future losses are expected to boost the bottom line going forward.

Also, growth in credit cards and investment products along with steady international expansion will usher meaningful revenue opportunities in time.

Earlier this week, the CEO, Jamie Dimon commented in an interview on CNBC that the company will soon increase its annual dividend from 20 cents per share to as much as $1. The dividend hike is expected in the second quarter of 2011.

According to Dimon, once the Federal Reserve completes its stress tests on the large U.S. banks and gives its approval, JPMorgan will be among the first U.S. banks to increase its dividend.

JPMorgan shares are maintaining a Zacks #3 Rank, which translates into a short-term ‘Hold' recommendation. We have a long-term “Neutral” recommendation on the stock.

As JPMorgan is a banking giant with exposure to almost all the major banking businesses and since it is the first among the big U.S. banks to report, its results are going to be a significant indicator of performance by other major banks during the quarter.

Close on the heels of JPMorgan, among other major banks, Citigroup (C) is scheduled to report on January 18, Goldman Sachs (GS) on January 19 and Morgan Stanley (MS) on January 20.