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JPMorgan Earnings Overshadowed by Margin Loan to Controversial Company

- By Yamil Berard

JPMorgan Chase & Co. (JPM) handily exceeded market expectations in its fourth-quarter earnings, but a margin loan loss to a troubled South African global retailer stole much of the bank's thunder as it released results Friday morning.

The bank reported fourth-quarter earnings per share of $1.76, or seven cents higher than projections. Managed revenue of $25.5 billion was up 5%, according to the bank's estimates.

Revenue from the bank's equity market was flat year over year. Partly to blame was a $143 million margin loan to an unidentified client that was disclosed during this morning's earnings presentation.

In the call, JPMorgan's Chief Financial Officer Marianne Lake spoke of the account as being associated with Steinhoff International Holding N.V. (SNH).

Steinhoff (JSE:SRR) is a South African retail company that has some holdings in the U.S.-based Mattress Firm. It has seen its stock prices plummet since last month after reports surfaced that the company was facing issues with accounting irregularities.


Today's bank presentation also highlighted credit costs of $130 million, driven by a reserve build for Steinhoff.

Bank officials said in today's conference call that the Steinhoff losses would likely impact other big banks.

Tax law

JPMorgan also faced losses of 37% to net income, which totaled $4.2 billion, attributed to accounting changes as a result of the Tax Cuts and Jobs Act. (The figure that estimates earnings of $1.76 per share excludes the effect of the tax bill. If you factor in the net income losses from the tax bill, the earnings per share is $1.07.)

On the other hand, the new tax law is expected to deliver a tax benefit in the range of $3.5 billion to $4 billion.

Jamie Dimon, the bank's chairman, president and chief executive officer, said in today's call that the bank would disclose over the "next couple weeks" details of a broad strategy to create sustainable benefits for its employees, customers and communities.

"If what we're going to do might take a bite into the $3.5 billion to help support and grow communities, so be it," Dimon said.

Just before Friday's market close, shares of the bank were trading at $112.67 a share, up 1.65%.

According to the Peter Lynch chart, the stock is slightly overvalued. The median is $90.60.


Financial strength

Key financial drivers released today included the following:

In consumer and community banking, the bank had $475 billion in average loans compared to $466 billion in fourth-quarter 2016. It had $652 billion in average deposits compared to $607.2 billion over the same period last year.

The bank's net interest income was $13.4 billion, up 11% from the same period last year. The bank says the increase was driven by the net impact of rising interest rates, as well as loan and deposit growth.

Its Tier 1 capital ratio, a measure of the bank's financial strength, was 13.8%, compared to 14.1% in fourth-quarter 2016.

The bank has $2 trillion in assets under management, up 15%, reflecting higher market levels and net inflows into long-term and liquidity products.

Bond revenue losses

JPMorgan reported markets revenue of $3.4 billion, down 26% year over year.

A big part of that was losses in bond revenue of $2.2 billion, down 34% year over year. Bank officials say it was driven by low volatility and tighter credit spreads against a strong prior-year quarter.

GuruFocus indicators

According to GuruFocus, the bank has a financial strength rating of 4 out of 10. It is ranked 5 out of 10 in profitability and growth.

Its price-earnings ratio (P/E) is reportedly 16.06, higher than 53% of the global banking industry.

Its price-book ratio (P/B) of 1.67 is lower than 64% of its industry competitors.

Its dividend payout ratio is 0.29 and is 88% higher than its industry competitors.

This article first appeared on GuruFocus.