Leslye Davis/The New York TimesJPMorgan Chase’s earnings were eroded, in large part, by a legal expense of $9.2 billion.
Updated, 12:01 p.m. |
JPMorgan Chase, the nation’s largest bank, reported a third-quarter net loss of $380 million on Friday as it continued to grapple with a raft of regulatory and legal woes.
The added costs dragged down JPMorgan’s results as the bank posted a net loss of 17 cents a share. JPMorgan’s earnings were eroded, in large part, by a legal expense of $9.2 billion, including money set aside in reserve for costs and regulatory proceedings.
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“While we had strong underlying performance across the businesses, unfortunately, the quarter was marred by large legal expense,” Jamie Dimon, the bank’s chief executive, said in a statement.
The third-quarter earnings report came as JPMorgan is enmeshed in protracted negotiations with the Justice Department to resolve investigations of questionable mortgage practices.
During the negotiations — which have occurred in fits and starts — JPMorgan has offered to pay a fine of roughly $7 billion and provide $4 billion in relief for struggling homeowners to wrap up a range of mortgage-related headaches, according to people familiar with the matter. The settlement is still in flux, though, and the monetary penalties could change.
JPMorgan “continues to seek a fair and reasonable settlement with the government on mortgage-related issues – and one that recognizes the extraordinary circumstances of the Bear Stearns and Washington Mutual transactions, which were undertaken at the request or encouragement of the U.S. government,” Mr. Dimon said.
Mr. Dimon’s reference to a “fair and reasonable settlement” evokes his earlier statements, which have called the government’s investigations related to Bear Stearns unfair. JPMorgan purchased the flailing bank during the depths of the financial crisis, a deal that was blessed by the federal government.
Excluding the one-time costs, JPMorgan’s earnings were $5.8 billion, or $1.42 a share, exceeding Wall Street analysts’ expectations of $4.65 billion, or $1.21 a share. To arrive at the adjusted earnings figure, the bank subtracted out $7.2 billion on an after-tax basis for the corporate litigation costs and added in a $992 million benefit on an after-tax basis from reserve releases.
Revenue fell to $23.9 billion, from $25.9 billion in the period a year earlier. Analysts had estimated revenue of $24.06 billion.
Marianne Lake, JPMorgan’s chief financial officer, cautioned that legal expenses were “significantly larger than even we could have anticipated even a short while ago.” Echoing Ms. Lake, Mr. Dimon expressed a desire to “reduce the uncertainty for investors,” adding that the legal headaches and tense landscape is “painful.”
Adding to its legal costs, JPMorgan agreed to pay $1 billion in September to resolve sweeping investigations into a multibillion-dollar trading loss in May 2012. As part of that payout, JPMorgan also settled investigations by the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau into the bank’s credit card products.
To help cushion against those legal costs, JPMorgan Chase set aside $23 billion in litigation reserves—a figure that the bank has not previously disclosed. That pot of money includes the $9.15 billion, which the bank added during the third quarter.
It is the first time that JPMorgan has had a quarterly loss under the leadership of Mr. Dimon, who was hailed for his risk prowess after successfully steering the bank through the financial crisis in far better shape than its peers.
The last time JPMorgan had reported a quarterly loss was in 2004, as the bank struggled to assess its total exposure to a range of settlements related to Enron and WorldCom.
As the nation’s largest bank, JPMorgan is considered something of a bellwether for the banking industry.
Like its rivals, JPMorgan is wrestling with rising interest rates that have eroded homeowner demand for refinancing mortgages.
The banking industry has long been bracing for a slowdown in mortgage refinancing, a stream of income that had been a consistent bright spot in recent years. An uptick in interest rates this year has helped to diminish demand.
Lackluster demand was evident in JPMorgan’s third-quarter mortgage results. Loan originations were $40.5 billion, down 14 percent from the period a year earlier. Still, income from mortgage banking was $705 million for the quarter, up 13 percent from the year-ago period.
The latest turmoil is compounding concerns within the banking industry, which is already grappling with ways to offset an anemic economic environment.
The bank’s investment banking and trading, though, is helped by the shifting rates. Within its corporate and investment bank, JPMorgan reported a 12 percent increase in net income, which was $2.24 billion for the third quarter. Fees from investment banking were $1.5 billion, up 6 percent from the period a year earlier.
The broader challenges faced by JPMorgan and the banking industry could precipitate deeper cost cutting. Total head count at JPMorgan was 255,041, down by 4,103 from a year earlier.
Even as JPMorgan works to whittle down its costs, in part, by slashing jobs, JPMorgan reported $23.6 billion in noninterest expenses, a surge of more than 50 percent from a year earlier.
Net-interest margin—a key metric that measures the profits that banks make through lending—slimmed to 2.18 percent, down from 2.43 percent during the same period in 2012.
Despite the uncertainty in the broad banking environment, JPMorgan’s results revealed some encouraging signs about its clients. JPMorgan successfully courted more deposits, reporting average total deposits of $456.9 billion, an increase of 10 percent from a year earlier.
In the bank’s credit card business, for example, JPMorgan said sale volume rose by 11 percent, to $107 billion, for the third quarter. In a promising signal for JPMorgan, fewer credit card customers fell behind on their bills during the third quarter. The number of loans more than 30 days delinquent dipped from 2.15 percent last year to 1.69 percent in the latest quarter.
To help supplement diminished profits from riskier businesses like trading, which have been weighed on by a slate of new regulations, JPMorgan has refocused on its asset-management business.
That unit reported net income of $476 million for the quarter, up 7 percent from the period a year earlier. JPMorgan continued to make advances in its private banking, reporting revenue of $1.5 billion, up 9 percent from the third quarter of 2012.
Another bright spot for JPMorgan was the consumer and community bank unit, where profits grew by 15 percent to $2.7 billion.
For JPMorgan, the banner settlements in September should help the bank move beyond the multibillion-dollar trading loss that led to Congressional hearings, numerous investigations and helped to tarnish the bank’s reputation.
Still, JPMorgan is far from finished with its legal worries. Mr. Dimon said that while legal expenses were expected to level off, they “may continue to be volatile over the next several quarters.”
The bank faces scrutiny from at least seven federal agencies, several state regulators and two countries. Federal authorities are also examining the bank’s decision to hire the children of well-connected Chinese officials in part of a wide-ranging bribery investigation.
Banking regulators are also investigating JPMorgan’s so-called correspondent banking business, in which the bank works with foreign banks to process transactions overseas. That business, authorities suspect, is vulnerable to money laundering. JPMorgan has moved to rein in the business in response to the broad regulatory concern.
JPMorgan has vowed to fix any lingering control or compliance issues at the bank.
The bank’s shares were up 8 cents to $52.60 as of noon on Friday.
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