JPMorgan Chase & Co's quarterly earnings fell 25 percent, excluding an accounting gain, as European financial turmoil reduced demand for securities underwriting and acquisition advice.
The results are the first for the third quarter from a major U.S. bank and underscore how market turmoil has clobbered underwriting and merger advisory fees. JPMorgan shares closed down 4.8 percent on Thursday, pulling down other big bank stocks and weighing on the wider market.
There were some very strong headwinds for JPMorgan, said Marshall Front, chairman of Front Barnett Associates LLC.
JPMorgan Chief Executive Jamie Dimon said the company will cut 1,000 jobs in its investment bank over the next 18 months. Banks globally are laying off staff as new regulations squeeze potential profits and as stock and corporate credit markets weaken. But Dimon said JPMorgan's cuts are mainly due to increased use of automation.
The bank did post 1 percent loan growth, which Dimon said was a positive for the economy and showed that the rest of the bank is generally on an even keel compared with the chronically volatile investment banking business. Mid-sized companies and small businesses, in particular, are borrowing more, he said.
The bank's return on equity, a measure of profitability, was 9 percent, close to the 10 percent that some analysts view as a likely long-term average for major banks under new regulations and capital rules.
JPMorgan posted quarterly earnings of $4.3 billion, or $1.02 per share, down from $4.4 billion, or $1.01 per share, in the same quarter last year.
The results were muddied by adjustments for the market value of the bank's debt, which gave it a $1.9 billion pre-tax gain. When the bank's debt weakens relative to U.S. Treasuries, it can record an accounting gain because it could profit from buying back debt.
The bank reported a private equity loss of $347 million on lower market values and appraisals for its investments. A year ago, private equity investments added $344 million to profit.
Despite the weak environment in investment banking, JPMorgan bought back $4.4 billion of its stock during the quarter, reducing its diluted outstanding shares by 3 percent.
We have a tremendous amount of capital, Dimon said in a conference call with reporters.
Said David Dietze, chief investment strategist at Point View Wealth Management in Summit, New Jersey, They are putting their money where their mouth is.
(The buyback) shows a degree of confidence. They don't see a cash crunch. The takeaway here is to be more optimistic about regional bank results but not be jumping up and down about the prospects of Morgan Stanley and Goldman Sachs.
Dimon has complained publicly and in private meetings with regulators that capital surcharges for the biggest banks are unfair and will stymie lending and economic growth.
Shares of Bank of America Corp, Citigroup Inc and Morgan Stanley closed down about 5 percent, while Goldman Sachs Group Inc lost almost 3 percent. All are due to report third-quarter results next week.
JPMorgan took a valuation adjustment for its widening bond spreads that amounted to 29 cents a share after taxes in the third quarter. Given the company's share count, that amounts to $1.1 billion. Excluding that from the quarterly earnings, profit declined about 25 percent from a year earlier.
Further complicating the calculation, the bank generated losses from this same item in last year's third quarter.
The third quarter was rough for investment banks, as the U.S. stock market, as measured by the S&P 500 index, dropped 14 percent. Investment-grade corporate bond spreads widened by more than 50 percent, according to Bank of America Merrill Lynch indexes, an eye-popping move.
With markets gyrating that much, many companies are reluctant to acquire rivals or issue securities. JPMorgan said its quarterly fees for underwriting and merger advisory fell 31 percent from a year earlier to $1 billion. Revenue from stock and bond trading was down 14 percent, not counting the accounting gain.
Obviously, the worse Europe gets, the worse it is for us, but we think it is something we can handle, just like we handled 2008, Dimon said.
In a change from recent quarters, the bank did not significantly draw down its reserves for bad loans. Some analysts wondered if JPMorgan expects a new round of defaults, but Dimon insisted the bank was just being conservative.
Staffing in the investment bank fell to 26,615 in the third quarter from 27,716 in the second quarter. Dimon said many of the coming job cuts would made through attrition.
Compensation expense in the investment bank was $1.85 billion, an usually low 29 percent of revenue. Dimon told analysts that for the full year, he expects the ratio to be in the bank's usual range of 35 percent to 40 percent.
The bank recorded $1 billion of litigation expense, mainly for mortgage-related items, down from $1.3 billion last year.
The report from JPMorgan comes as the industry struggles to hold onto recent profits after losing tens of billions of dollars in the financial crisis.
Dimon said JPMorgan is examining expenses in light of new regulations threatening its profitability, and it may cut back on plans to add to its 5,300 branches. Some branches may not be viable now that the government has limited how much banks can charge merchants for debit card transactions, he said.
Asked in a conference call with reporters about an Occupy Wall Street march this week to his New York City home, Dimon said, When people talk about major issues that are important to the country, you should try to listen and not just have a knee-jerk reaction.
If you tell me that jobs are all critical, I agree. The important part is to get policy right so that we get this country going again.
Shares of JPMorgan have fallen with other bank stocks, losing 25.5 percent of their value this year through Thursday, compared with a 3.8 percent drop in the S&P 500.
(Reporting by David Henry in New York; additional reporting by Clare Baldwin, Lauren Tara LaCapra and Dan Wilchins in New York and Rick Rothacker in Charlotte, N.C.; editing by John Wallace)