JPMorgan Chase & Company’s (JPM) third quarter earnings came in at 82 cents per share, substantially ahead of the Zacks Consensus Estimate of 49 cents. This compares favorably with 9 cents in the prior-year quarter.
Better-than-expected results were primarily aided by continued strong performance by the Investment Bank group. All the other segments except Consumer Lending and Card Services also delivered solid results during the quarter. However, a continuation of high levels of credit costs in Consumer Lending and Card Services loan portfolios and an increased provision for credit losses were the primary factors that negatively impacted the results.
Net income available to common shareholders was $3.6 billion, compared to $2.7 billion in the prior quarter and $527 million in the prior-year quarter. The year-over-year increase was driven by higher net revenue, largely offset by a higher provision for credit losses and higher non-interest expense.
Managed net revenue for the quarter came in at $28.8 billion, up 79% from $16.1 billion in the year-ago quarter.
Managed non-interest revenue was $14.0 billion, up 167% year-over-year. The increase was driven by higher principal transactions, primarily related to the absence of markdowns on legacy leveraged lending and mortgage positions, strong trading results in the Investment Bank segment and higher investment portfolio trading income from Corporate. Net interest income was $14.8 billion, up 36% year-over-year.
Non-interest expense for the quarter was $13.5 billion, up 21% from the prior-year quarter. The increase was driven by the impact of the Washington Mutual transaction and higher performance-based compensation expenses, partially offset by lower headcount-related expenses.
The managed provision for credit losses increased 47% year-over-year to $9.8 billion. The total consumer-managed provision for credit losses was $9.0 billion, compared to $5.7 billion in the year-ago quarter, reflecting higher net charge-offs and an increase in the allowance for credit losses, largely related to home lending and credit card loan portfolios.
Credit quality significantly deteriorated during the quarter. As of Sept. 30, 2009, nonperforming assets increased 16% sequentially to $20.4 billion. Net charge-offs increased 6% sequentially to $6.4 billion. As a result, the net charge-off rate deteriorated 32 basis points (bps) sequentially to 3.84%. Allowance for loan losses was up 27 bps sequentially to 5.28% of ending loans.
The company maintained a strong balance sheet with Tier 1 Common Capital of $101.4 billion. The Tier 1 Common Capital ratio was 8.2% at Sept. 30, 2009 (estimated), versus 7.7% at June 30, 2009 and 6.8% at Sept. 30, 2008.
Book value per share of common stock was $39.12, compared with $37.36 at June 30, 2009 and $36.95 at Sept. 30, 2008.
Net income for the Investment Bank segment was $1.9 billion, compared to $882 million in the prior-year quarter. These results included the negative impact of the tightening of the firm’s credit spread, offset by the positive impact of counterparty spread tightening and gains on legacy leveraged lending and mortgage-related positions. Net revenue increased 85% year-over-year to $7.5 billion.
Net income for the Retail Financial Services segment decreased 89.0% year-over-year to $7 million. The decrease in net income was a result of higher provision for credit losses, largely offset by the positive impact of the Washington Mutual transaction. Net revenue for the quarter increased 66% year-over-year to $8.2 billion, reflecting the impact of the Washington Mutual transaction, wider loan spreads and higher deposit balances offset partially by lower loan balances.
The Card Services segment reported a net loss of $700 million, compared to a net income of $292 million in the prior-year quarter. The loss was primarily driven by a higher provision for credit losses, partially offset by higher net revenue. Net revenue for the quarter increased 33% year-over-year to $5.2 billion.
Net income for Commercial Banking increased 9% year-over-year to $341 million. The increase in net income was the result of higher net revenue, partially offset by a higher provision for credit losses and higher non-interest expense. Net revenue increased 30% year-over-year to $1.5 billion, reflecting the impact of the Washington Mutual transaction.
Treasury & Securities Services reported a net income of $302 million, down 26% from $406 million in the prior-year quarter. The decrease was driven by lower net revenue offset partially by lower non-interest expense. Net revenue decreased 8% year-over-year to $1.8 billion.
Net income for the Asset Management segment increased 23% year-over-year to $430 million. The year-over-year increase was due primarily to higher net revenue and lower non-interest expense, offset partially by a higher provision for credit losses. Net revenue for the quarter increased 6% year-over-year to $2.1 billion.
We anticipate continued synergies from the company’s diversification and strong capital position, but increasing provisions and worsening credit quality will be a drag on upcoming results. Therefore, we are maintaining our Neutral recommendation on the shares of JPMorgan.
Read the full analyst report on “JPM”
Zacks Investment Research