JPMorgan Chase & Co. (JPM:US)’s quarterly profit fell 7.3 percent on $2.6 billion of settlements tied to Bernard Madoff’s Ponzi scheme as rising legal costs ended the firm’s three-year streak of record annual earnings.
Fourth-quarter net income declined to $5.28 billion, or $1.30 a share, from $5.69 billion, or $1.39, a year earlier, according to a statement today from New York-based JPMorgan, the biggest U.S. bank. Results excluding the Madoff settlement and other one-time items were $1.40 a share. Twenty-two analysts surveyed by Bloomberg estimated $1.37 on average.
Chief Executive Officer Jamie Dimon, 57, is whittling down the firm’s list of legal woes that include allegations it misled buyers of mortgage bonds, rigged markets and turned a blind eye to suspicious activity by customers. The Madoff agreement, which the bank said last week reduced fourth-quarter profit by about $850 million, capped a year in which JPMorgan spent more than $23 billion on legal settlements.
“All things considered, it wasn’t a bad quarter,” said Pri de Silva, senior banking analyst at CreditSights Inc. in New York. “They had something close to a kitchen-sink quarter getting some legal issues done.”
Shares of the company climbed 23 cents to $57.93 at 3:14 p.m. after rising as much as 1.5 percent. The stock advanced 33 percent last year, compared with (JPM:US) the 35 percent gain of the 24-company KBW Bank Index, the benchmark’s best annual performance since 1997.
Revenue dropped 1.1 percent to $24.1 billion while expenses declined 3.1 percent to $15.6 billion. Full-year net income fell 16 percent to $17.9 billion. The company lost its title as the most-profitable U.S. bank after San Francisco-based Wells Fargo & Co. posted $21.9 billion in annual earnings today.
JPMorgan’s litigation costs sapped $1.1 billion from fourth-quarter profit, the company said. The firm booked a $7.2 billion charge in the third quarter amid provisions to cover legal expenses, including part of a record $13 billion settlement of mortgage-bond probes.
“It’s our belief that this firm is not exposed today or will not be exposed going forward to those levels of risk at anywhere near that scale going forward,” Chief Financial Officer Marianne Lake said today on a conference call.
Earnings at the corporate and investment bank tumbled 57 percent to $858 million, driven by a $1.5 billion charge from changing the valuation of some over-the-counter derivatives to incorporate funding costs. So-called funding valuation adjustments, or FVA, estimate a present value of those funding costs rather than spreading them over the life of the derivative contract. Revenue at the unit fell 21 percent from a year earlier to $6.02 billion.
The division’s prospects are appealing, Dimon said today on a conference call for analysts. The CEO also said he was optimistic about U.S. economic growth, which he said bodes well for JPMorgan.
Excluding the impact of accounting charges, profit at the unit was down 11 percent to $2.1 billion, while revenue declined 2 percent to $8 billion. Within the markets and investor services unit, fixed-income revenue was $3.2 billion, little changed from the previous year, and equity revenue fell 2.5 percent to $873 million.
Net income from consumer and community banking climbed 19 percent to $2.37 billion as provisions for credit losses fell and expenses declined. The consumer division benefited from a $1.2 billion reduction in the allowance for loan losses. Revenue was $11.3 billion, down 8 percent from a year earlier.
Mortgage fees and related income dropped 46 percent to $1.09 billion in the quarter, from $2.04 billion a year earlier. Home-loan originations were $23.3 billion, down 54 percent.
That was echoed at Wells Fargo, the largest U.S. home lender, which saw fourth-quarter mortgage-banking income drop by almost half from year-earlier levels to $1.57 billion. The company posted a 10 percent advance in profit to $5.61 billion.
JPMorgan said asset-management profit rose 18 percent to $568 million as client holdings climbed 12 percent to $2.3 trillion amid greater inflows and rising equity markets. Commercial banking profit was little changed at $693 million, compared with $692 million a year earlier.
JPMorgan avoided prosecution in the Madoff case by acknowledging that it ignored red flags for about 15 years that Madoff used his account to fund his fraud, Manhattan U.S. Attorney Preet Bharara said. Madoff is serving a 150-year federal prison sentence.
“We are pleased to have made progress on our control, regulatory and litigation agendas and to have put some significant issues behind us,” Dimon said in the statement.
Still to be resolved are inquiries into whether hiring practices in Asia violated anti-bribery laws, as well as possible manipulation of interest rates and currency benchmarks. The bank is also being probed about mortgage-bond trades after the financial crisis.
“What you want to hear is that they’re resolving these issues, and that by the end of 2014 they get to a place where we’re talking about business operations and not the resolution of litigation or regulatory issues,” Marty Mosby, a bank analyst with Guggenheim Securities LLC., said before earnings were released.
During a conference call with reporters today, Dimon declined to say whether the bank would settle the remaining legal issues this year. He said last month that he’s motivated to resolve cases, even if doing so means higher expenses than fighting claims in court.
“So you may have paid a premium to settle, we thought it was a far better thing to do,” Dimon said at a Dec. 11 conference. “It’s very hard to go to court in some of these matters if you’re a bank.”
JPMorgan eliminated 3,845 jobs during the quarter, bringing the total to 251,196, according to a financial supplement on the company’s website.
JPMorgan, which has said it’s severing ties with foreign banks and individuals to tighten anti-money laundering controls, said last week it’s weighing options including a sale of its prepaid-card business. The bank was the fourth-biggest prepaid-card issuer in 2012, with $9.8 billion of volume, according to the Nilson Report, an industry newsletter.
The lender, which replaced 2 million debit cards after a data breach last year at retailer Target Corp., wasn’t significantly affected by the issue, according to Lake.
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