An uptick in trading and deal making lifted JPMorgan Chase & Co.'s first-quarter profit out of the funk of late 2011, but the recovery fell short of the good times the largest U.S. bank enjoyed a year ago.
The results beat Wall Street expectations as investment banking revenue rebounded from the fourth quarter. But it was not enough to surpass the levels achieved in the first quarter of last year as net profit fell 3 per cent.
JPMorgan also got a boost from improvements in credit quality and loan demand – a trend seen in the performance of Wells Fargo & Co. as well. The No. 4 U.S. bank separately reported higher first-quarter profit as mortgage banking improved and it set aside less money for bad loans.
"The revenue is what really impressed me. It tells me there's more economic activity, maybe, than what we were previously thinking – more demand for credit, more demand for banking services, more business out there," said Joe Terril, founder of Terril & Co, a money manager in St. Louis, Missouri.
The results Friday from two of the largest U.S. banks confirm investor optimism that has fed a market rally this year. The KBW index of bank stocks is up more than 20 per cent this year, and JPMorgan shares are up 32 per cent.
But on Friday, investors appeared to be shifting their focus to gauging the strength of the recovery, and JPMorgan's numbers gave them reasons to take a breather.
The bank's net interest margins – a core measure of profitability of banks – fell, and JMP Securities analyst David Trone said traditional banking revenue other than mortgage banking remained sluggish.
The results could raise expectations for rivals such as Goldman Sachs Group Inc., Morgan Stanley, Bank of America Corp. and Citigroup Inc., which are due to report quarterly results in the coming days.
Investors have been keen to hear bank executives say whether they see convincing evidence that business demand for loans will continue to increase, and JPMorgan chief financial officer Doug Braunstein offered them some hope.
Mr. Braunstein said a rise in the bank's business loan balances reflected, in part, new strength in the economy. JPMorgan also took market share from rivals. Business borrowing is considered a sign of confidence that will lead to more hiring and, in turn, more borrowing from banks by households.
The bank's business loan balances at the end of the first quarter were up 3 per cent from the end of December and up 16 per cent from a year earlier.
Business loan balances at U.S. banks as of March 28 were up 14 per cent from a year earlier, according to Federal Reserve data, which uses slightly different measurements.
JPMorgan said first-quarter net income was $5.4-billion, or $1.31 a share, compared with $5.6-billion, or $1.28 a share, a year earlier.
Analysts had been expecting $1.18 a share, according to Thomson Reuters I/B/E/S. Per-share earnings rose because of a 4-per-cent decline in quarter-end share count due to share buybacks.
Mr. Braunstein said special items combined to reduce earnings per share by about 9 cents: expenses for mortgage-related matters and litigation reserves; an accounting adjustment for the value of JPMorgan debt; a boost from reducing reserves for bad loans. In the year-earlier quarter, special items added 3 cents a share.
Revenue was $27.4-billion, up 24 per cent from the 2011 fourth quarter and up 6 per cent from the first quarter of 2011.
Investment banking posted net revenue of $7.3-billion, down 11 per cent from a year earlier but up 68 per cent from the 2011 fourth quarter.
JPMorgan's retail financial services booked a profit of $1.75-billion, compared with a loss of $399-million a year earlier, when the division was the bank's worst performing unit. Revenue in the division, which houses the bank's expanding branch banking system, climbed 40 per cent to $7.65-billion.
"We were expecting a very good quarter and they have outshined even our very high estimates," said Gary Townsend, president and chief executive of Hill-Townsend Capital. "We're seeing good credit trends. We're seeing a snapback in capital markets operations."