JPMorgan said on Friday first-quarter net profit fell 3 percent, but its results beat Wall Street expectations, helped by a rebound in investment banking revenue from the fourth quarter. Improvements in credit quality and loan demand also boosted results and provided a positive sign for the economy.
"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."
Separately on Friday, Wells Fargo & Co reported higher first-quarter profit as the No. 4 U.S. bank posted strong mortgage banking results and set aside less money for bad loans.
The results from two of the largest U.S. banks signal an improvement in the U.S. economy and a resurgence of activity in capital markets after the euro zone crisis brought activity to a screeching halt late last year.
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.
Braunstein told reporters in a conference call that a rise in the bank's business loan balances reflected, in part, new strength in the economy. JPMorgan also took market share from rivals.
The bank's business loan balances at the end of the first quarter were up 3 percent from the end of December and up 16 percent from a year earlier.
Business loan balances at U.S. banks as of March 28 were up 14 percent from a year earlier, according to Federal Reserve data, which uses slightly different measurements. Business borrowing is considered a sign of confidence that will lead to more hiring and, in turn, more borrowing from banks by households.
JPMorgan's higher investment banking revenue, after a dismal 2011 fourth quarter, also bodes well for rivals such as Goldman Sachs Group Inc, Morgan Stanley, Bank of America Corp and Citigroup Inc, which will all report results in the coming days.
"JPMorgan's numbers are being driven by investment banking. The signal for Morgan Stanley and Goldman Sachs is unbelievably positive," said Richard Bove, an analyst at Rochdale Securities.
A surge of investor optimism for banks has led the stock market higher this year. The KBW index of bank stocks is up more than 23 percent this year, and JPMorgan shares have risen 35 percent.
JPMorgan shares were down 44 cents to $44.40 in early trading on the New York Stock Exchange.
RESULTS BEAT EXPECTATIONS
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 percent decline in quarter-end share count due to share buybacks.
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 percent from the 2011 fourth quarter and up 6 percent from the first quarter of 2011.
Investment banking posted net revenue of $7.3 billion, down 11 percent from a year earlier but up 68 percent 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 percent to $7.65 billion.
"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. (Reporting by David Henry in New York; additional reporting by Ilaina Jonas, Lauren LaCapra and Jed Horowitz; Editing by Paritosh Bansal, Gerald E. McCormick and John Wallace)
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