Billions in legal costs gnaw into JPMorgan Chase profit

New York TimesJanuary 14, 2014 

JPMorgan Chase reported a 7.3 percent slump in fourth-quarter earnings Tuesday, as billions of dollars in legal costs from a series of government settlements continued to weigh on profit at the nation’s largest bank.

The net earnings of $5.28 billion, or $1.30 a share, fell slightly below Wall Street analysts’ expectations of $1.35 a share.

The results underscored how expensive it has been for the bank to obtain peace with Washington. All told, JPMorgan has paid roughly $20 billion over the last 12 months to resolve government investigations.

The fourth-quarter results included a charge of 27 cents a share in legal costs. Excluding those items, the bank reported profit of $1.40 a share on net revenue of $24.1 billion, exceeding analysts’ expectations of $1.35 a share on net revenue of $23.67 billion.

Bracing for the large payouts, JPMorgan had set aside $9.2 billion in the third quarter, a move that led the bank to report its first quarterly loss ever under Jamie Dimon as chief executive. While much of the settlement cost was covered in that quarter, JPMorgan said the bank would set aside an additional $850 million to cushion against expenses that spilled over.

The latest steep payout for the bank came last week, when JPMorgan reached a $2 billion settlement with federal authorities who accused the bank of ignoring warning signs of Bernard L. Madoff’s huge Ponzi scheme. And in November, the Justice Department and other authorities extracted a record $13 billion settlement from JPMorgan over the bank’s sale of questionable mortgage securities in the run-up to the financial crisis.

“We are pleased to have made progress on our control, regulatory and litigation agendas and to have put some significant issues behind us this quarter,” Dimon said in a statement Tuesday. Referring to a number of recent settlements, he added, “It was in the best interests of our company and shareholders for us to accept responsibility, resolve these issues and move forward.”

As JPMorgan, once a favorite in Washington, has been buffeted by legal woes, Dimon and the bank’s top executives have adopted a reconciliatory stance toward the thicket of regulatory challenges, choosing to hash out settlements rather than enter court brawls that can be expensive – and potentially embarrassing.

Despite the chastened earnings, some analysts struck an optimistic tone, noting that the settlements, however expensive, would finally allow JPMorgan and its top executives to focus on expanding their businesses.

The results Tuesday also included a few one-time gains, including the sale of Visa’s shares and One Chase Manhattan Plaza.

Within the earnings, there were a couple of bright spots, including automobile originations, which increased 16 percent, to $6.4 billion. And revenue from private banking increased 11 percent from the period a year earlier, totaling $1.6 billion.

JPMorgan successfully courted customers in its asset management business. Total client assets were $2.3 trillion, an increase of 12 percent from a year earlier.

Still, there are challenges. JPMorgan, like its Wall Street peers, is grappling with sluggish demand for loans. Particularly bruising is the sharp decline in mortgage refinancing – a bright spot for banks in recent years – as rising interest rates deter homeowners.

Lackluster demand for mortgages underpinned the fourth-quarter results again, as mortgage loan originations fell 54 percent, to $23.3 billion, from a year earlier. Even as revenue was down, profit went up 34 percent on lower losses for soured mortgages and reduced noninterest expenses.

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