J.P. Morgan beats expectations in the first quarter

Record revenues from fixed income and equity markets corroborate the bank's conviction that balance sheet strength will help it to win market share.

J.P. Morgan yesterday reported first-quarter net income of $2.1 billion, slightly down on the $2.4 billion in the same period last year, resulting in an earnings per share (EPS) of $0.40 versus $0.67 in the first quarter of 2008. The results follow a 2008 full-year profit of $5.6 billion, translating into an EPS of $1.37.

Overall, it was good news for the US bank with EPS beating consensus estimates of $0.32 a share and revenues reaching $26.9 billion, up on the consensus prediction of $22.95 billion.

At the end of the first quarter, the bank's tier-1 capital ratio was 11.3%, or 9.2% when excluding money from the government's Troubled Asset Relief Program (Tarp). The bank has $28 billion put aside for credit losses.

"We remain focused on capital and balance sheet strength. These levels of capital and reserves, combined with our significant pre-provision earnings power, enable us to withstand an even worse economic scenario than we face today," Jamie Dimon, J.P. Morgan's chairman and CEO, said yesterday in a written statement.

The investment banking business recorded a net profit of $1.6 billion -- a reversal of the $2.3 billion loss that it made in the last quarter of 2008 and a $1.7 billion increase on the first quarter of last year. A record net revenue of $8.3 billion lies behind the improvement, even though the bank admits that this was partially offset by higher provisions for credit losses and higher non-interest expenses. Investment banking fees were $1.4 billion, up 14% from the previous year, driven by a strong showing in debt underwriting.

As with rival firm Goldman Sachs, fixed income markets proved to be the best performer with the business contributing $4.9 billion worth of revenue, more than 10 times the amount in the same quarter last year. The bank attributes this to record results in credit trading, emerging markets and rates, with good results in currencies. Equity markets revenue also reached a record high, $1.8 billion, on the back of trading as well as prime brokerage services. There were however net markdowns, totalling $711 million, on funded and unfunded commitments for leveraged lending. Mortgage related markdowns amounted to $214 million.

Much of this reinforces what Dimon said in January during an analyst call following the 2008 full-year results, which is posted on seekingalpha : "The results on the client side have really been exceptional, the market share gains, I think that's true on investment banking and on trading. We see a lot more client flow and we think we're going to do very well servicing investor and corporate clients."

On the same call, Dimon also talked about the Bear Stearns acquisition the firm made in the first quarter of 2008 saying: "We still expect to get $1 billion of earnings from Bear Stearns late in 2009; predominantly, prime brokerage is doing well and energy and commodities, but it also helped and aided our business in equities, fixed income and really across the board we got some terrific bankers in the deal."

Apart from Bear Stearns, what will have helped the firm grab market share is the fact that J.P. Morgan has come out of the subprime crisis relatively unscathed and hence has become a preferred counterparty for a number of corporate and investor clients.

Investment banking did, however, double its provision for credit losses in the first quarter to $1.2 billion to take into account the worsening credit environment. Evidence that things will get worse before they get better can also be seen in the increase of non-performing loans: in the first quarter non-performing loans were $1.8 billion, compared to $620 million in the final quarter of 2008.

J.P. Morgan's share price has generally been on the rise since the beginning of the year. Although there was a dip in March to just under $16, by Wednesday it had doubled to $32 off the back of investor expectations of strong results. Yesterday's better-than-expected numbers helped sustain the rally and the stock was up 2% to $33.20 in early New York trading.

It wasn't all good news, however. Private equity continued to be a drag on earnings and the bank's portfolio was written down further to $6.6 billion after notching up a net loss of $280 million in the quarter. This compared with an income of $57 million in the same period last year. In 2008 overall, private equity losses were $1.1 billion, bringing the carrying value at the end of the financial year down to $6.9 billion.

After acquiring Bear Stearns and Washington Mutual last year, and because of a relatively unimpaired balance sheet, J.P. Morgan entered 2009 looking stronger than most of its peers. The bank has been candid that challenges lie ahead with businesses such as credit cards seeing the negative impact of rising unemployment. But the bank's success in managing its balance sheet, and in investment banking specifically, suggest that it is well-positioned to weather the storm.

"We are confident that even a highly adverse economic scenario would not compromise our overall strength and stability -- or our ability to enhance our franchises," said Dimon yesterday in conclusion. And J.P. Morgan's first quarter results corroborate his belief. 

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