Sun | Oct 22, 2017

JPMorgan profit falls, fails key regulatory test

Published:Thursday | April 14, 2016 | 12:00 AM
JPMorgan Chase CEO Jamie Dimon.

JPMorgan Chase said on Wednesday that its first-quarter profit fell more than eight per cent from a year earlier and 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 on Wednesday, the Federal Deposit Insurance Corporation and the Federal Reserve announced that JPMorgan, 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 October 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 JPMorgan CEO Jamie Dimon has repeatedly touted the firm's "fortress" balance sheet, which has said would protect the bank 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 the company's balance sheet. JPMorgan's plan relies on moving money from foreign subsidiaries, which could be difficult in event of a global financial crisis.

NO EXPECTED SETBACKS

JPMorgan chief financial officer Marianne Lake told investors on Wednesday that she did not expect that the bank's results would be held back as it improves its plan to meet regulator concerns. And investors did not seem to be concerned. JPMorgan shares rose US$2.45, or four per cent, to US$61.72 in afternoon trading 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 Federal Reserve signalled that 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 on Wednesday that it earned US$4.99 billion after payments to preferred shareholders in the first quarter. That compares to a profit of US$5.45 billion a year earlier. On a per share basis, the bank earned US$1.35, compared with US$1.45 a year earlier.

The bank had to set aside US$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 US$100 a barrel. The price fell to a 12-year low to below US$27 a barrel in the first quarter. Crude was trading under US$42 on Wednesday.

Net revenue at the bank totalled US$23.24 billion, compared with US$24.07 billion in the same period a year earlier.

- AP