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Friday, January 13, 2012

Chasing Profits (NYSE: JPM)

NEW YORK - J.P. Morgan & Chase saw profit sink to $3.7 billion from $4.8 billion a year ago. Earnings were $3.4 billion after preferred share dividends or 90 cents a share. Return on equity dropped to 11.4% from 15%. The company's provision losses were appropriate and annaulized over 1% of loans. The company had over $1.1 billion in losses in mortgage litigation issues and Debit Valuation Adjustments. DVA is a weird accounting entry that measures the fair value of a liability discounted by a company's credit strength. JPM's strength increased in the quarter which raises the liability. Discounting a liability by a company's own credit risk makes little sense but this is the current accounting convention.

The tier 1 common ratio increased to 10%; their estimated Basel III ratio is 7.9% despite tangible equity remaining flat over the year and assets increasing. The investment bank had a decent quarter after adding back DVA losses. The investment bank would have have earned $1.3 billion after adding back this accounting loss. On the positive side the company saw loan growth of over $23 billion and deposit growth of over $35 billion from just the last quarter alone.

Jamie Dimon the CEO of JPM said "Dimon added: “As the economy continues to recover, we are gratified to see signs of improvement in loan demand and credit quality. Commercial Banking had its sixth consecutive quarter of loan growth, including a 17% increase in middle-market loans over the prior year."

JPM stock is down close to 3% in pre-market trade. Investors are digesting somewhat weak results from JPM. JPM appears to be taking some steps back after posting earth shattering results in early 2011.

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