JPMorgan Chase & Co. (NYSE: JPM) posted a 55% rise in first-quarter net income led by fixed-income trading and investment banking. But to ensure its profits remain in tact, the bank continues to fight against proposed financial reform.
JPMorgan, the second-largest U.S. bank by assets, beat analysts' estimates with net income of $3.33 billion, or 74 cents a share. Estimates averaged 64 cents a share.
Investment banking brought in $2.47 billion, 74% of total net income. The area is usually a strong contributor to profits, kicking in 57% in the previous quarter and 75% in the first quarter of 2009.
JPMorgan claims the results are a strong indication of global financial economic improvement.
"There is clear and broad-based improvement in the economic factors in the United States and around the world," Chief Executive Officer Jamie Dimon, told reporters on a conference call. "It appears to be strengthening, not weakening. It is possible that they will strengthen enough to end up with a strong recovery."
JPMorgan is the first of the big banks to post first-quarter earnings and it has set the benchmark now for the rest of the industry. Bank of America Corp. (NYSE: BAC) and Citigroup Inc. (NYSE: C) will release their numbers April 16 and April 19, respectively.
The banking industry is also taking JPMorgan's results as a sign that credit loan losses are diminishing. Banks can decrease their reserve amounts while enjoying fewer payment delinquencies and loan defaults.
"The key factor for this quarter for banks will be to say reserve builds are largely behind us and the outlook for lower problem loans and loan losses has improved for the second half of the year," Anthony Polini, an analyst at Raymond James & Associates, Inc. told Bloomberg . "It's the outlook that matters."
Increase in Regulation Means Decrease in Revenue
JPMorgan's big profit comes at a time when financial reform threatens to drastically alter the profitability of large financial institutions.
The current Senate bill could cost JPMorgan billions in fees and revenue losses. Proposed reform includes contributing to a fund for the potential collapse of other financial firms, increasing payments to regulators, restricting account fees, and having to sell off trading divisions.
Separation of banking and trading activities - which would mirror the goal of the Glass-Steagall Act - is one of the most hotly debated topics of financial reform.
JPMorgan was the first bank to receive permission from the Federal Reserve Board in 1990 to underwrite securities. The rest of the ‘90s saw a handful of corporate mergers uniting the commercial banking and securities industries.
JPMorgan was the number one underwriter of stocks and bonds in the United States in 2009.
Also threatening JPMorgan's future profits is the Volcker Plan. President Barack Obama announced in January he planned to include elements of former Fed chairman Paul Volcker's plan in a financial reform proposal that would limit banks' proprietary trading and hedge fund activity.
"While the financial system is far stronger today than it was one year ago, it's still operating under the same rules that led to its near collapse," Obama said at the White House. "Never again will the American taxpayer be held hostage by a bank that is too big to fail."
It's uncertain how much regulation will actually change as the bill moves through Congress. The most recent financial reform bill presented by Sen. Christopher J. Dodd, D-CT, is not expected to have trouble getting approval - a sign that it might not include enough regulation to prevent another financial meltdown.
"[T]hat should immediately raise our suspicions," said Money Morning Contributing Editor Martin Hutchinson. "After all, the U.S. financial-services business has a very effective lobby, so if there isn't huge opposition to the legislation, it probably won't achieve all that much. It won't fix Wall Street."
Post-financial crisis, both investors and Washington have beaten up Wall Street, and many executives are staying quiet - except for JPMorgan CEO Dimon.
After supporting such practices like the Troubled Asset Relief Program (TARP) and accepting $25 billion in bailout funds, Dimon argues that there are enough protections in place, and wrote that in regards to financial regulation, "we must also be cognizant of the danger of the pendulum swinging too far."
Dimon has been a regular presence in Congress during financial reform hearings and contributed $6.2 million to lobbying efforts in 2009. He has called some of the reform proposals "un-American" and argues customers would suffer.
"The incessant broad-based vilification of the banking industry isn't fair and it is damaging," said Dimon to The Wall Street Journal. "Punishing whole industries, whether you were reckless or not, just isn't the way to do things."
News and Related Story Links:
- Bloomberg:
JPMorgan Net Rises 55% on Improved Outlook for Economy, Housing - The Wall Street Journal:
Mr. Dimon Goes to Washington - Money Morning:
Financial Reform: Three Ways to Fix Wall Street - Money Morning:
Goldman's Earnings Call Overshadowed by Obama's Glass-Steagall Revival - Money Morning:
Money Morning Mailbag: How the Demise of Glass-Steagall Helped Spawn the Credit Crisis - Money Morning:
JPMorgan Close to $1.4 Billion Tax Refund Deal, Joining Long List of Companies Cashing In