Less than a year after America's largest bank was shamed by a multibillion-dollar trading loss, earning one infamous trader the nickname the "London Whale," JPMorgan is on the rise. The bank announced a 33 percent increase in first quarter earnings this week, earning $6.1 billion and thumping analysts' expectations of $5.4 billion in net income.
How did the bellwether bank do it? Here are some highlights:
Investment banking: This was the big one. JPMorgan showed strong (muscular even!) results from its investment banking arm, which profited $2.61 billion, rising 28 percent from this time last year and 30 percent from the fourth quarter of 2012, says MarketWatch.
Mortgage lending: "A bright spot for JPMorgan's earnings was mortgage lending, fueled in part by federal programs that have helped damp interest rates," reports the New York Times. Homeowners are refinancing at lower rates, allowing the bank to post a profit of $673 million for the first quarter — strong, though down 31 percent from a year earlier.
Credit cards: Sales volume in the credit card business rose to $94.7 billion this report, a 9 percent increase from the same quarter a year earlier, says the Times.
Auto lending: This part of the business rose 12 percent from a year ago, to $6.5 billion.
Asset management: "The bank has pinned some of its hopes for future profitability on its asset management business, as profits from riskier businesses like trading get undercut by a spate of new regulation," says the Times. The net income for the asset management business was $487 million for the quarter, up 26 percent from a year earlier.
Reducing reserves: More than $1 billion of the bank's $6.5 billion net income came from releasing reserve funds. Naturally, this has led some analysts to question if the earnings report was deceptively strong.
Reducing expenses: That means jobs, of course. In February, JPMorgan presented plans to eliminate 17,000 jobs by the end of next year in an effort to save the company $1 billion annually. The Financial Times reports that the bank already cut 3,000 jobs in its consumer banking and mortgage business during the quarter, which surely helped produce such promising numbers.
So: While JPMorgan appears to have its sea legs back, Wall Street isn't exactly rallying behind the earnings report. In fact, shares traded lower this morning, at least in part because of the funds gained from reducing reserves. "Investors typically don't like those types of profits since they are not a true indication of demand for the bank's services," writes CNN.
And the earnings report doesn't paint the full picture. In an article called "Why JPMorgan Chase Is Unsafe At Any Scale," Steve Denning from Forbes says that "in addition to the $2.290 trillion shown on its balance sheet, JPMorgan also has derivative assets of $1.660 trillion (that’s trillion, not billion), which are 'off-balance sheet.'" He goes on:
Is it gambling in derivatives that is enabling JPMorgan to make record profits in a depressed marketplace? The public has no information and no way of finding out.
Does it matter? Recall that it was the hidden risk of derivatives that caused the global financial meltdown in 2008. Remember too that the $6 billion loss from the London Whale at JPMorgan was caused by precisely these activities. [Forbes]
As for Jamie Dimon, the bank's outspoken CEO, who made headlines this week for calling the London Whale situation "the stupidest and most embarrassing situation I have ever been a part of"? He's taking a cautiously optimistic tone. "We are seeing positive signs that the economy is healthy and getting stronger," he said in a press release. But he also noted that small businesses remain "cautious about the recovery and fiscal uncertainty, and are not investing their capital."