JPMorgan Chase & Co. (JPM) recorded net income of $5.7 billion for
4Q'12, flat with the prior quarter, but up 52.7% from the prior year,
according to Fitch Ratings.
Performance was supported by strong loan and deposit growth, record debt underwriting fees in the investment bank, and continued stabilization in credit, including a $700 million pre-tax benefit from lower mortgage reserves in real estate portfolios. Significant items, including the reserve benefit, the Independent Foreclosure Review (IFR) settlement, debit valuation adjustments (DVA), and other tax benefits, were essentially a wash in the quarter.
JPM began reporting results along its new business lines in the quarter. The Corporate and Investment Bank (CIB) which combines the former Investment Bank and Treasury and Security Services segments had solid performance, which was down modestly from the prior quarter when adjusting for the DVA impact and other factors. Investment banking fees were up on strong debt underwriting and advisory revenue, but markets and investor services revenue declined with reduced fixed income and equity revenue and included a modest loss on the transferred CIO portfolio. The CIB VaR declined in 4Q'12 due to run-off of the CIO synthetic credit portfolio and lower volatility in the look-back period.
Results for the Consumer and Community Banking (CCB) segment, which includes the former Retail Financial Services and Card and Auto segments, including mortgage, were down on a sequential basis given the impact of runoff portfolios and higher expenses associated with mortgage-related costs. Card, merchant services, and auto had a solid quarter with growth in sales and processing volumes. Net charge-offs in card hit another record low, but reserve releases in the segment were nil given management's expectations that loss rates were at-or-near bottom.
Mortgage banking income was down during the quarter, given the IFR settlement, which amounts to about $2 billion including approximately $750 million of cash payments. The settlement will reduce firm costs by about $100 million-$150 million per quarter going forward. Origination volume was up during the quarter, given the continuation of refinancing activity, and the mortgage repurchase liability declined $249 million due to improved cure rates on agency repurchase requests.
Loans were up 9% on a core basis, excluding run-off portfolios, and deposits continued to grow. Still, the core net interest margin was down 7 basis points from 3Q'12 given the low interest rate environment and more limited reinvestment opportunities.
Basel III capital ratios rose 30 basis points sequentially, to 8.7% at YE12, while the Basel I Tier 1 common ratio was up 60 basis points, to 11%, which Fitch considers solid. Fitch expects JPM to continue building capital in anticipation of additional capital requirements as a globally systemically important financial institution. The firm is targeting a Basel III capital ratio of 9.5% by YE13. JPM was out of the market for some time in 2012 following losses in CIO, but Fitch believes share repurchase activity will be more regular in 2013. Management indicated that repurchase volume will be less than $3 billion per quarter, given the appetite to meet Basel III capital targets more quickly, which Fitch views favorably.
Separate from earnings, JPM entered into consent orders with its regulators related to reviews associated with CIO trading losses and the Bank's BSA/AML policies procedures and controls. The latter order was not anticipated by Fitch and related to OCC identified deficiencies associated with BSA/AML compliance programs. Fitch believes the firm will work closely with regulators to remediate any issues associated with the orders, including submitting a written plan detailing enhancements to board oversight of compliance with BSA/AML.
JPM's management task force and board also completed a review of CIO and released their respective reports. Many recommendations were consistent with those included in the consent orders and have been or are in the process of being implemented. Weaknesses highlighted in the reports were also drivers of Fitch's downgrade of JPM in May 2012. However, Fitch believes a variety of actions have since been taken to strengthen corporate governance at the firm, although there is still work to do.
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