J.P. Morgan Earnings Look Good Because Expectations Were Low

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JPMorgan Chase & Co. (JPM) reported second-quarter results before markets opened Tuesday. The investment bank and financial services giant posted adjusted diluted earnings per share (EPS) of $1.46 on revenue of $25.35 billion. In the same period a year ago, J.P. Morgan reported EPS of $1.60 on revenue of $25.96 billion. Second-quarter results also compare to the consensus estimates for EPS of $1.29 on revenue of $23.76 billion.

On the surface it looks as though J.P. Morgan was able to manage expectations niftily enough to post what looks to be a big beat on both profits and revenues. But both are down compared with the same period a year ago. Profits slipped from $6.5 billion to $6 billion, more than 8%, and revenues are down 2%. The EPS estimate fell from $1.41 at the end of the first quarter.

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Net income in the bank's consumer and community banking division fell 21% year-over-year to $2.4 billion. The lower profit was due to higher provision for credit losses and lower net revenue which fell from $12.02 billion a year ago to $11.43 billion in the second quarter this year.

The provision for credit losses this year was $852 million, compared with a gain of $19 million in the year-ago quarter. The actual allowance for loan losses fell by $357 million, but total net charge-offs rose to $1.2 billion, compared with the year-ago quarter in which the allowance for loan losses equaled total net charge-offs.

Net income in the mortgage banking group fell $433 million year-over-year to $709 million. Pretax income in the mortgage production group fell $519 million year-over-year to $63 million. Mortgage application volumes totaled $30.1 billion, down 54% year-over-year, but up 15% sequentially.

CEO Jamie Dimon said:

Despite continued industry-wide headwinds in Markets and Mortgage, the firm has continued to deliver strong underlying performance. … Toward the end of the second quarter, we saw encouraging signs across our businesses including an uptick in wholesale utilization, strengthening pipelines in our commercial and business banking segments, and some improvements in markets activity. While it is too early to assume that this momentum will continue, we have confidence in the long-term growth of the economy.

Morgan increased its Basel III Tier 1 common ratio to 9.8% in the first quarter.

The bank did not offer guidance in its press release, but the consensus estimates call for third-quarter EPS of $1.35 on revenues of $23.86 billion. The EPS estimate for the 2014 fiscal year is now $5.29, down $0.58 a share from the estimate at the end of the first quarter.

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Shares traded about 2.5% higher in Tuesday's premarket to $57.75. The current 52-week range is $50.06 to $61.48. Thomson Reuters had a consensus analyst price target of around $64.80 before the results were announced.

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