JPMorgan Profit Falls on Europe Crisis

PHOTO: Jamie Dimon, chairman and chief executive officer of JPMorgan Chase & Co., listens during an interview on the third day of the World Economic Forum Annual Meeting 2011 in Davos, Switzerland, Jan. 28, 2011.PlaySimon Dawson/Bloomberg/Getty Images
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JPMorgan Chase, the first of the biggest banks reporting their year-end results, said Friday that fourth-quarter profit fell 23 percent but was in line with analyst expectations.

The largest bank by assets said in a statement that profit fell to $3.73 billion, or 90 cents a share, from $4.83 billion, or $1.12, a year earlier. Investment banking revenue declined by 30 percent as trading slowed because of the financial crisis in Europe.

With the relatively challenging year to banks' revenues, annual bonus and compensation may be the lowest in three years, analysts forecast. JPMorgan generally pays bonuses four to six weeks into its first quarter.

Before the earnings announcement, David Konrad, analyst with investment bank Keefe, Bruyette and Woods, gave a lower forecast than consensus for the bank's earnings but gave it the highest of its three ratings, outperform. Konrad expected 80 cents earnings per share, lower than the consensus of 90 cents.

Konrad called the earnings figures "a fairly soft quarter by their standards," but a lower tax rate and low investment banking pay-to-revenue-ratios, known as compensation ratios, worked in the bank's favor.

Konrad said JPMorgan is "top" in the universal bank space given its diversified business mix, strong balance sheet and near-term potential for a return on equity.

"We believe these returns were reasonable given the environment, although the return for the fourth quarter was modestly disappointing," Jamie Dimon, CEO of JPMorgan Chase, said in a statement.

Due to the elongated European sovereign debt crisis, Keefe, Bruyette and Woods recently lowered earnings estimates at four of the universal banks, JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley.

Last quarter, "dramatic volatility" negatively impacted bank earnings, including Goldman Sachs, which reported its second quarterly loss as a public company.

Konrad said given the continued uncertainty in Europe, the fourth quarter would be characterized more by limited activity and leverage across institutional investors and across corporations. U.S. investors are largely concerned with the possible spillover effects in the U.S.

"Continuing this theme, we believe investors will focus on investment banking fees, trading, and card loan balances in an effort to determine whether the pullback in customer activity is temporary or the sign of a more sustained decline in customer risk tolerance," he wrote in a note earlier this week.

Konrad said bank stocks could react positively to favorable results on those measures.