JPMorgan Chase said Wednesday that its first-quarter profit fell more than 8 per cent from a year earlier and the bank tried to soothe investor concerns after it failed a key regulatory test designed to prevent another financial crisis.
First-quarter profit at JPMorgan, the nation’s largest bank by assets, was hurt by weak results at its investment-banking division and by loans to oil and gas companies that are now struggling to make payments because of low energy prices.
As JPMorgan was announcing its quarterly results Wednesday, the Federal Deposit Insurance Corporation and the Federal Reserve announced that it, as well as four other banks, failed to meet a regulatory requirement put in place after the financial crisis. They were required to come up with a plan, known as “living will,” to unwind their operations in the event of a bankruptcy or other upheaval in a way that would avoid triggering another broad financial meltdown.
Regulators called the banks’ plans “not credible” and gave them until Oct. 1 to come up with new plans or face more stringent requirements.
It was symbolic defeat for JPMorgan and its executives. JPMorgan was one of the few banks to weather the housing downturn and financial crisis and CEO Jamie Dimon has repeatedly touted the firm’s “fortress” balance sheet, which he says would protect it from any future crisis.
“We are going to do everything we can to fix this problem,” Dimon said in a conference call with reporters.
The regulators’ issues with JPMorgan appear to be tied more into the bank’s legal structure than its balance sheet. JPMorgan’s plan relies on moving money from foreign subsidiaries, which could be difficult in event of a global financial crisis.
JP Morgan Chief Financial Officer Marianne Lake told investors she did not expect that the bank’s results would be held back as it addresses regulators’ concerns. And investors did not seem to be concerned. Shares in New York-based JPMorgan & Co. rose $2.51, or 4.2 per cent, to close at $61.79 on Wednesday amid a broad rally in bank stocks.
Still, this latest regulatory issue comes at a difficult time for JPMorgan and other big banks. Profits and share prices have fallen in recent months because loans to energy companies have gone bad and the Fed signalled it will slow the pace of interest rate increases, which hurts bank profits. Despite Wednesday’s rally, the financial sector is the worst performing sector of the Standard & Poor’s 500 index this year.
JPMorgan said it earned $4.99 billion after payments to preferred shareholders in the first quarter. That compares to a profit of $5.45 billion a year earlier. On a per share basis, the bank earned $1.35, compared with $1.45 a year earlier.
The results beat analysts’ expectations of $1.26 per share, according to FactSet. That estimate typically excludes one-time items.
The bank had to set aside $719 million in the quarter to cover potential defaults of loans to oil and gas companies and materials and mining companies. JPMorgan, like most of its competition, made billions in loans to drilling companies when oil prices were near $100 a barrel. The price fell to a 12-year low to below $27 a barrel in the first quarter.
Net revenue at the bank totalled $23.24 billion, compared with $24.07 billion in the same period a year earlier.
The company said profit at its investment bank fell 22 per cent from the year before to $1.98 billion. Profit from its consumer bank rose 12 per cent to $2.49 billion.