Thursday, April 14, 2011
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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Debt-laden banks are the biggest threat to global financial stability and they must refinance a $3.6 trillion "wall of maturing debt" which comes due in the next two years, the International Monetary Fund said in its Global Financial Stability Report.
Many European banks need bigger capital cushions to restore market confidence and help reduce the risk of another financial crisis, according to the IMF's report, published on Wednesday.
Banks around the world are facing a $3.6 trillion "wall of maturing debt" coming due in the next two years, and the rollover requirements are most acute for Irish and German banks, the report said.
"These bank funding needs coincide with higher sovereign refinancing requirements, heightening competition for scarce funding resources," the IMF said.
However the IMF said Spain's efforts to control its budget deficit have increased investor confidence and make it unlikely the country will follow Portugal in calling for a bail-out.
"The actions that have been taken in Spain recently have managed to decouple in the views of markets the fortunes of Spain relative to those of Portugal" and Ireland, said Jose Vinals, director of the IMF's monetary and capital markets department.
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- Total Spending Planned $3.8 Trillion
- Projected Annual Deficit $1.6 Trillion
- Interest Payments $207 Billion
- Spending Cut $38 Billion
- Headlines "Congress and the President Cut Spending"
- Reality, 2010 Budget was 3.5 Trillion, 2011 Budget is 3.8 Trillion
Congratulations America, you just saved 38 billion dollars on a budget that never was. That’s right, your actual 2011 budget is larger than what you spent in 2010. The 2011 deficit will be larger as well. A projected 1.6 trillion dollars in new debt is planned for 2011, yet today, Washington D.C. wants us to believe that they are serious about getting our financial house in order. The fact remains that the Republicans and Democrats just approved a budget that is LARGER than last year's budget.
Talk about a scam! The headlines are talking about historic cuts, yet spending and borrowing are going to actually rise from 2010. Has the world gone insane? How is it possible that congress approves more spending and borrowing than last year, yet everyone in the media is talking about a cut. Using D.C.’s logic an alcoholic who planned on downing his 38th beer for the evening could just drink half and then let everyone know at his AA meeting that he has been drinking less. Even though the night before he only drank 35 beers. If this doesn’t make sense, it’s not supposed to because that's how bad Americans have been swindled into thinking there was an actual budget cut. We're sorry if this is turning into a rant, but you can’t say you cut spending when your spending more than last year, the year before that, and all previous years in our nation's history.
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