July 13, 2012

Q2 Earnings Kickoff: JPMorgan Down, Wells Fargo Up and Markets Heave Sigh of Relief

JPM announces clawbacks and another $4.4 billion in trading losses while WFC sees big boost from mortgages

JPMorgan Chase CEO Jamie Dimon testifying on Capitol Hill in mid-June. (Photo: AP) JPMorgan Chase CEO Jamie Dimon testifying on Capitol Hill in mid-June. (Photo: AP)

Friday the 13th was lucky for JPMorgan Chase & Co. (JPM) and Wells Fargo (WFC) as both banks’ stocks rose higher despite dark news that preceded their second-quarter 2012 earnings reports.

JPMorgan posted lower profits of $5 billion, down 8.7% from a year ago, due largely to the chief investment office’s (CIO) trading losses of $4.4 billion in the quarter, according to JPMorgan’s Q2 earnings report. Also on Friday, JPMorgan announced plans to claw back compensation from CIO traders involved in the losses. But considering the bank’s disastrous London Whale trading troubles, JPM’s $1.21 earnings per share versus last year’s $1.27 cheered investors and analysts, who had expected per-share earnings of only $0.70.

Wells, meanwhile, reported that Q2 profits rose 17% to $4.6 billion from $3.9 billion a year ago. Earnings stood at $0.82 per share, a penny higher than analysts’ expectations.

The bank’s massive mortgage business, with $131 billion of originations in Q2 versus $129 billion in Q1 and $64 billion a year ago, was clearly unhindered by a $175 million settlement with the Justice Department for Wells’ alleged discrimination against minority homeowners between 2004 and 2009. "Litigation accruals" related to that settlement, announced Thursday, were including in the $524 million operating loss. The bank had an operating loss of $477 million in the first quarter.

JPM Stock Sees Relief Trade

In early afternoon trading, JPMorgan stock was up 5.92% at $36.06 versus Thursday’s close of $34.04. WFC also was up, by 3.23%, to trade at $33.91 versus Thursday’s close of $32.85.

“In general, we’re seeing some strength come through in the stock prices,” said Shannon Stemm, a finance sector analyst with Edward Jones, in a phone interview after the earnings releases. “It’s a mixed picture with JPM, driven more by relief, and Wells is driven more by underlying strength with the company’s earnings consistency.”

Stemm was pleased with the steps that JPMorgan has taken to address “what’s been a disappointing situation,” and said the $4.4 billion loss was large but manageable given the large size of JPMorgan’s balance sheet.

Turning to the Wells settlement, she said, “It’s always good to see lawsuits and legal uncertainty put behind a company. As far as that lawsuit impacting the overall mortgage activity at Wells, no, you haven’t seen that and you’re not going to see that going forward.”

J.P. Morgan Asset Management Down 10.9%; Wells Wealth Unit Up 1.8%

JPM unit J.P. Morgan Asset Management saw profits decrease to $391 million, down 10.9% from $439 million a year ago but up from $386 million in the prior quarter. Revenue from private banking was $1.3 billion, up 4% from a year ago.

In Wells’ business segment covering wealth, brokerage and retirement, profits rose to $343 million, up 1.8% from $337 million a year ago and up from $296 million in the prior quarter. Wealth management reported client assets of $197 billion, down $8 billion, or 4%, from a year ago. The wealth, brokerage and retirement unit includes 15,170 financial advisors as of June 30, an increase over the 15,134 financial advisors reported as of March 31. This figure includes 10,913 advisors in the traditional brokerage channel, lower than the 10,987 reported in the previous quarter.

During JPMorgan's two-hour earnings call, Chief Financial Officer Doug Braunstein announced that year-to-date losses amounted to $5.8 billion. And in a mea culpa moment during the call, JPMorgan CEO Jamie Dimon acknowledged that the bank had made serious missteps and was now engaged in equally serious efforts at damage control.

“We are not proud of this moment,” Dimon said, “but we are proud of the company. We not making light of this. We think is an isolated event. Obviously, on this one we shot ourselves in the foot.”

Also during the call, JPMorgan announced a two-year compensation clawback that targets the CIO traders responsible for the London losses, including former CIO chief Ina Drew, who left the bank after news of the bad trade broke.

Click for more of AdvisorOne's 2Q 2012 earnings coverage.Senate Banking Committee Chairman Tim Johnson, D-S.D., said following the clawback announcement that it was welcome news. In June, Johnson called on Dimon to testify on the trading loss and pressed him on clawbacks.

“To help restore confidence in our financial system, Wall Street banks should use this effective tool whenever it is appropriate,” Johnson said in a statement.

Q2 Now Officially Underway

Now that JPMorgan and Wells have reported, the second-quarter earnings season is officially under way. Edward Jones’ Stemm said she expected capital-market weakness to be a driver in the results that get reported.

“The expectations were low already, so when you think about JPMorgan—and this also relates to Bank of America and Citigroup—JPM met or slightly exceeded expectations, but the macroeconomic environment is weak, and that really bled through into some of the investment banking results. I think you’re going to see that trend continue. When you look at Wells, the standout strength there was mortgage banking, most of it driven by refinancing and new applications for refinancing homes. I think you’re going to see those more regional-focused banks get a lift from improved mortgage banking activity.”

Read about JPMorgan and Wells Fargo’s first-quarter 2012 earnings at AdvisorOne.

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