JPMorgan sees higher Katrina costs
No. 3 bank posts strong results but CEO says estimate from storm damages will rise.
NEW YORK (CNNMoney.com) - JPMorgan Chase & Co. posted sharply higher fourth-quarter earnings Wednesday but CEO James Dimon said losses from Hurricane Katrina could cost the nation's No. 3 bank much more than previously estimated.
Speaking on a conference call, Dimon said that the company's previous estimate of about $400 million in costs from Hurricane Katrina was at the low end of what the company now expects.
He said the earlier estimates will probably be revised upward by "a couple of hundred million dollars" and will be recorded either in the second or third quarter of 2006.
Still, Dimon said that the increased costs from the storm won't be material for the financial results of the New York-based bank.
In the first half of 2006, Dimon said he hoped the company could see a $500 million benefit as fewer people file for bankruptcy.
Losses related to bankruptcies were an estimated $650 million before taxes as about 500,000 Americans sought bankruptcy protection in the week before an Oct. 17 law change made it tougher and more costly for companies and consumers to file for bankruptcy.
The company estimated that 50 percent to 75 percent of the bankruptcies were "timing differences," in which people that were in financial trouble accelerated their timeline for filing before the law took effect.
But he warned the second half of the year may come under pressure as higher minimum payments on credit cards result in more consumers defaulting on their debt.
Banks said they decided to raise the minimums in an effort to prevent consumers from falling too far into debt and while Dimon said he expects the new regulation to benefit banks, chargeoffs will climb in the second half.
Strong 4Q earnings but weak trading
The bank said quarterly profits increased to $2.7 billion, or 76 cents a share, from nearly $1.7 billion, or 46 cents, a year earlier. The company attributed the gains to strong investment banking profits that offset weaker trading revenue and losses from a surge in bankruptcy filings.
Excluding expenses related to JPMorgan's purchase of Bank One in 2004 and an insurance recovery, profit was $2.6 billion, or 73 cents per share. Previous year earnings included $1 billion of merger and accounting-related pretax charges.
Wall Street analysts expected earnings of 72 cents, according to earnings tracker Thomson Financial.
Investment bank earnings were flat overall as investment banking fees rose 8 percent, to $1.2 billion, their highest since the first quarter of 2000.
However, fixed-income markets revenue of $1.1 billion was down 28 percent from last year, and down 55 percent from a record third quarter because of weak trading results. Analysts had largely expected a decline in trading given unusually strong third quarter results but the drop was higher than some had expected.
The bank blamed poor positioning in U.S. interest rate and commodities markets for the decline.
Speaking to reporters Wednesday, JPMorgan CEO Jamie Dimon said while the fourth quarter was disappointing, the company will continue to work hard to reduce volatility going forward and improve its risk controls.
"We are hiring good salesman, good salespeople, good traders, improving our systems risk controls," he said. "We're disappointed in this quarter's volatility but we wont' stop doing the right thing."
In a separate call with analysts, Dimon said that the company, which recorded $6 billion in trading revenue in 2005, expects to post even better results this year.
Yield curve pressure
The retail banking sector continued to struggle this year as the flattening yield curve puts pressure on the company's margins. Dimon said margins would be "stable to worse" in 2006 and net income interest growth will also be flat.
The yield curve, which refers to the slope of rates in the Treasury bond market, briefly inverted in late December when the two-year note yield exceeded the 10-year yield, a rare occurrence that generally bodes badly for the economy and the financial sector in particular.
Banks and securities firms borrow money at short-term rates and lend at long-term rates. A flat yield curve, therefore, squeezes margins while an inverted one hurts a bank's profits.
Looking into 2006, Dimon said the company is currently focused on organic growth and isn't actively looking to make any further acquisitions.
Internationally, however, the company does plan to continue to grow its investment banking, private banking and treasury and securities services businesses either through organic means or with possible joint ventures, similar to its deal with Cazenove.
"We're not in any acquisitive mode right now," he said. "But I'd never say never anything like that."
And while the international consumer market is increasingly growing more attractive for U.S. banks, Dimon said the "consumer is a long-term view for us."
Analysts are bullish about the prospects for the Big 3 banks. Find out more here.