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Thursday, April 14, 2011

JPMorgan loan drop raises concerns

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NEW YORK — JPMorgan Chase & Co. reported a 4% drop in its loan book in the first quarter, raising questions about the U.S. banking industry’s ability to boost profit as the U.S. housing sector continues to flail and businesses remain reluctant to borrow.

First-quarter earnings rose by two-thirds, but that increase came mainly from a drastic cut in the amount of money set aside for bad loans, a move that could be difficult to repeat over the long term.

The bank’s book of consumer loans shrank 10% in the quarter, and loans to corporate customers did not increase enough to make up for that. The No. 2 U.S. bank also took US$1.75-billion in charges linked to collecting payments on bad mortgages and foreclosures, and said an upcoming settlement with regulators over mortgage servicing abuses could force it to hire as many 3,000 people.

The quarterly results were the first from a major Wall Street bank. They beat expectations but raised concerns about lending profits, and bank shares broadly edged lower.

“The only way banks can grow earnings over the long term is to grow assets, which isn’t happening,” said Malcolm Polley, chief investment officer of Stewart Capital Advisors, with $1-billion under management.
“Assets in the industry are stagnant at best, and they will not grow in the foreseeable future,” Mr. Polley said.

Analysts and investors said a good deal of banks’ ability to grow in the future will depend on an expanding global economy, which will spur demand for loans, stock and bond underwriting, and other services. An acquisition outside the United States could help generate higher profit, too, analysts said.

U.S. retail sales rose only modestly in March as auto sales fell from the month before and consumers faced higher gasoline prices.

JPMorgan earned US$5.56-billion, or US$1.28 a share, in the first quarter, up from US$3.33-billion, or 74 cents a share, a year earlier. Wall Street analysts, on average, expected US$1.16 per share, according to Thomson Reuters I/B/E/S.

The bank set aside US$1.17-billion to cover bad loans, down from US$7.01-billion a year earlier. The smaller loan-loss provision resulted from lower credit losses for many types of loans, including credit cards.

Credit improvement was a key factor in regulators allowing JPMorgan in March to boost its dividend after stress tests.

In recent quarters, the bank has boosted profit mainly by setting aside less money to cover credit losses, rather than by generating more money from new loans. Pre-provision profit, a measure of how much the bank earns before setting aside money for credit losses, fell 20% to US$9.23-billion in the first quarter. Loans on the bank’s books fell 4% to US$686-billion, indicating demand for loans is tepid compared with how quickly existing loans are being repaid.

“JPMorgan can’t count on gains from (setting aside less money) in the future. If the bank can’t get their loan book growing in a significant way, they face a number of headwinds,” said Sean Egan, managing director at Egan-Jones Ratings.

The bank is making more loans to corporate customers, but the terms of those loans are easier than they have been in prior quarters, CEO Dimon said.

JPMorgan’s investment banking profit fell 4% to US$2.37-billion. Merger advisory and debt underwriting revenue rose, while stock underwriting fell, as did trading revenue.

Bond trading profits, though, were higher than some analysts had expected, which helped lift Goldman Sachs Group Inc GS.N shares 1.1%. Goldman is due to report earnings next Tuesday.

Fixed income trading fared better than estimated. Profit fell 4% to US$5.24-billion from the year-ago period, which was an exceptionally strong quarter but rose more than 80% from the fourth quarter.

One millstone for JPMorgan is its residential mortgage book, where it took a US$1.1-billion charge before taxes to account for the higher costs of collecting payments on mortgages, and a US$650-million charge before taxes for foreclosure-related matters. Chief Financial Officer Doug Braunstein said the bank would have to spend US$1.1-billion to hire the 2,000 to 3,000 people to comply with the mortgage servicing settlement, and the regulators may impose additional fees and penalties.

Chief Executive Jamie Dimon added, “I think a good global settlement would be good for everybody … Keeping this mess going on is not a good thing for anybody.”

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