JPMorgan Chase & Co reported tepid corporate loan growth in the first quarter, raising questions about the banking industry's ability to boost profit in coming years.
First-quarter earnings rose by two-thirds, but that increase came mainly from a drastic cut in the amount of money set aside for bad loans, a move that could be difficult to repeat over the long term.
The bank's book of consumer loans shrank 10 percent in the quarter, and loans to corporate customers did not increase enough to make up for that. The No. 2 U.S. bank also took $1.75 billion of charges linked to collecting payments on bad mortgages and foreclosures, and said an upcoming settlement with regulators over mortgage servicing abuses could force it to hire as many 3,000 people.
The quarterly results were the first from a major Wall Street bank. They beat expectations but raised concerns about lending profits, and bank shares broadly edged lower.
The only way banks can grow earnings over the long term is to grow assets, which isn't happening, said Malcolm Polley, chief investment officer of Stewart Capital Advisors, with $1 billion under management.
Assets in the industry are stagnant at best, and they will not grow in the foreseeable future, Polley said.
Analysts and investors said a good deal of banks' ability to grow in the future will depend on an expanding global economy, which will spur demand for loans, stock and bond underwriting, and other services. An acquisition outside the United States could help generate higher profit, too, analysts said.
U.S. retail sales rose only modestly in March as auto sales fell from the month before and consumers faced higher gasoline prices.
JPMorgan earned $5.56 billion, or $1.28 a share, in the first quarter, up from $3.33 billion, or 74 cents a share, a year earlier. Wall Street analysts, on average, expected $1.16 per share, according to Thomson Reuters I/B/E/S.
The bank set aside $1.17 billion to cover bad loans, down from $7.01 billion a year earlier. The smaller loan-loss provision resulted from lower credit losses for many types of loans, including credit cards.
Credit improvement was a key factor in regulators allowing JPMorgan in March to boost its dividend after stress tests.
JPMorgan shares are cheap, Wells Fargo analyst Matt Burnell said. The shares are worth 1.8 to 1.9 times their tangible book value but are trading at only 1.4 times their fiscal 2011 year-end tangible book value, he said. The shares are discounted because investors are looking for loan growth and are uncertain about ongoing mortgage business costs.
PRE-PROVISION PROFIT OFF
Chief Executive Jamie Dimon is often credited with skillfully piloting his bank through the financial crisis, but many investors are now looking for signs of revenue growth.
In recent quarters, the bank has boosted profit mainly by setting aside less money to cover credit losses, rather than by generating more money from new loans.
Pre-provision profit, a measure of how much the bank earns before setting aside money for credit losses, fell 20 percent to $9.23 billion in the first quarter.
Loans on the bank's books fell 4 percent to $686 billion, indicating demand for loans is tepid compared with how quickly existing loans are being repaid.
JPMorgan can't count on gains from (setting aside less money) in the future. If the bank can't get their loan book growing in a significant way, they face a number of headwinds, said Sean Egan, managing director at Egan-Jones Ratings.
The bank is making more loans to corporate customers, but the terms of those loans are easier than they have been in prior quarters, CEO Dimon said.
JPMorgan's investment banking profit fell 4 percent to $2.37 billion. Merger advisory and debt underwriting revenue rose, while stock underwriting fell, as did trading revenue.
Bond trading profits, though, were higher than some analysts had expected, which helped lift Goldman Sachs Group Inc shares 1.1 percent. Goldman is due to report earnings next Tuesday.
Fixed income trading fared better than estimated. Profit fell 4 percent to $5.24 billion from the year-ago period, which was an exceptionally strong quarter but rose more than 80 percent from the fourth quarter.
One millstone for JPMorgan is its residential mortgage book, where it took a $1.1 billion charge before taxes to account for the higher costs of collecting payments on mortgages, and a $650 million charge before taxes for foreclosure-related matters. Those costs will not be recurring, Chief Financial Officer Doug Braunstein said on a conference call with reporters.
Braunstein said that the bank would have to spend $1.1 billion to hire the 2,000 to 3,000 people to comply with the mortgage servicing settlement, and the regulators may impose additional fees and penalties.
CEO Dimon added, I think a good global settlement would be good for everybody ... Keeping this mess going on is not a good thing for anybody.
(Additional reporting by Dominic Lau in London, Joe Rauch in Charlotte, N.C., and Dan Wilchins in New York; Editing by John Wallace and Steve Orlofsky)