JPMorgan Reports First Loss Under Dimon; Analysts Say Not to Fear

As legal expenses are exploding at the bank, Street analysts remain bullish

Early Friday, JPMorgan (JPM) reported its first loss under CEO Jamie Dimon in the quarter, as it took a $7.2 billion after-tax charge to cover rising legal and regulatory costs.

In the past year or so, the bank — once considered the industry's darling for its lack of litigation — has racked up an estimated $14.7 billion in such expenses, according to estimates compiled by Tiburon Strategic Advisors.

JPMorgan's legal woes. Source: Tiburon Strategic AdvisorsThe company said its latest pretax legal charge was $9.2 billion, compared with $684 million a year earlier. It has litigation reserves of about $23 billion, but believes it’s possible for its losses to top these reserves by $5.7 billion.

While politicians have put JPMorgan in the legal spotlight, Wall Street analysts insist the company is on solid ground.

"If you can get past the headlines, this is still an extremely strong franchise, both in the U.S. and globally," said Fred Cannon, director of research and chief equity strategist at KBW, said Friday on CNBC, adding that the mortgage settlements represent "an opportunity, not as more of a distraction from a long-term value."

Said Dimon in a statement: “While we had strong underlying performance across the businesses, unfortunately, the quarter was marred by large legal expense. We continuously evaluate our legal reserves, but in this highly charged and unpredictable environment, with escalating demands and penalties from multiple government agencies, we thought it was prudent to significantly strengthen them. While we expect our litigation costs should abate and normalize over time, they may continue to be volatile over the next several quarters.”

For the quarter ended Sept. 30, the bank had losses of $380 million, or $0.17 a share, vs. profits of $5.71 billion, or $1.40 a share, a year ago. Earnings, after adjustments for one-time items, were $1.42 a share, topping analysts’ estimates of $1.30. Revenue for the quarter was $23.9 billion, compared with $25.9 billion in the prior year.

In early August, JPMorgan said its mortgage-bond sales practices were under criminal investigation by U.S. prosecutors in California. This could lead to a potential $11 billion settlement.

“The board 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,” Dimon noted.

Asset Management

The unit’s net income was $476 million, a 7% jump from the prior year. Net revenue improved 12% to $2.8 billion. Noninterest revenue expanded 15% to $2.2 billion due to net client inflows, the effect of higher market levels and higher placement fees, according to the bank.

Revenue from Private Banking hit $1.5 billion, up 9%, while retail sales rose 36% to $722 million. Institutional sales were $553 million, down 2% from a year ago.

Client assets were $2.2 trillion, an increase of $215 billion, or 11%, compared with the prior year. Assets under management were $1.5 trillion, an increase of $159 billion, or 12%, from the prior year.

Custody, brokerage, administration and deposit balances were $706 billion, up $56 billion, or 9%, from the prior year, thanks to higher market levels and custody inflows.

The unit has 6,023 financial advisors, up 3% from last year and the prior quarter.

Fixed Income

On Thursday, JPMorgan Chase said it has sold its holdings of short-term U.S. government debt held in money-market funds. Fidelity Investments made a similar announcement on Wednesday, noting that it chose not to hold any U.S. government debt that comes due near the time the nation could hit its borrowing limit.

Meanwhile PIMCO co-chief investment officer Bill Gross said he is taking the opposite tack. He's told investors to focus on short-term Treasuries rather than longer-maturity bonds.

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Check out JPMorgan CEO Meets With Attorney General Amid MBS Charges on ThinkAdvisor.

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