JPMorgan Chase NYSE:JPM Earnings Show Hopes for Dividend

by Ed Elfenbein | January 14, 2011 1:10 pm

JPMorgan Chase NYSE:JPM Earnings Show Hopes for Dividend

Good quarter for Jamie Dimon & Co at JPMorgan Chase & Co (NYSE: JPM[1]). Here are the details on JP Morgan’s fourth quarter earnings according to Bloomberg:

JPMorgan Chase & Co., the second- biggest U.S. bank by assets, said profit rose 47 percent as the bank cut provisions for future credit-card and real-estate losses by $4.9 billion.

Fourth-quarter net income climbed to $4.83 billion, or $1.12 a share, from $3.28 billion, or 74 cents, in the same period a year earlier and from $4.42 billion, or $1.01, in the third quarter, the New York-based company said today in a statement. The results compared with an average per-share estimate for adjusted earnings of $1 projected by 25 analysts surveyed by Bloomberg.

Hey, every so often I get something right. I had been saying that I expected earnings of at least $1.10 per share[2].

Let me explain something about banks’ earnings, beyond just today’s JP Morgan report. There’s an odd future-present relationship within a bank’s earnings statement. A bank needs to set aside reserves for its bum loans. The problem is that a bank can only make a guess as to how many of its loans will be bad (or non-performing to keep in jargon).

The bank can either guess too high or it can guess too low. If they knew exactly, they wouldn’t have made the loans in the first place. The issue to note is that a guess made today about the future impacts what they bank reports today. When you set aside more money for reserves, that’s money you can’t lend out. For a bank, that’s as critical as having Walmart take products off their shelves and put it back in the stock room.

If a bank doesn’t set aside enough in reserves, they can be criticized for sacrificing quality for quantity. What’s happening with JPM is the opposite. They set aside too much for bank reserves. Since the economy is slowing improving, they’re not draining bank reserves. Now they’re being criticized for artificially inflating their earnings. Bloomberg notes that 40% of JPM’s earnings for the first nine months of 2010 came from dipping into reserves.

I really don’t get these criticisms. It’s just the nature of the game.

JPM’s internal numbers look pretty solid. The fixed-income side is doing well, but nothing outstanding. Profits from investment banking are down. For the quarter, revenue rose by 13%. Fixed-income was decent, but not great. The retail banking and credit card businesses are now in the black. Both divisions reported losses a year ago, hence the lower reserves for losses. Profits for mortgage banking are up 117% from last year. The WSJ[3] notes that “Full-year compensation per employee in investment banking fell 2.4% for all to $369,651 from $378,599 in 2009.”

There’s no dividend increase just yet for JPM. Dimon has said that he wants the dividend to go to between 75 cents and $1 per share. JPM still needs approval from the Fed, but by April, they might be able to raise their dividend.

As of this writing, Ed Elfenbein did not own a position in any of the stocks named here. Ed is editor of Crossing Wall Street, a Web site about stocks and the market designed to help individual investors. Check out his free Buy List[4] of stock recommendations.

Endnotes:
  1. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  2. I had been saying that I expected earnings of at least $1.10 per share: http://www.crossingwallstreet.com/archives/2011/01/sp-500-1285.html
  3. WSJ: http://online.wsj.com/article/SB10001424052748703959104576081390840712256.html?ru=yahoo&mod=yahoo_hs
  4. Buy List: http://www.crossingwallstreet.com/buylist.html

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