Chase Making More Money by Losing Less

Most of the time, Wall Street’s attention is riveted on earnings per share. On January 14, when JPMorgan Chase (NYSE: JPM) reported fourth-quarter financial results before the stock market opened in New York, eyes were focused on revenue.

That’s because the economic cycle has turned far enough that banks are reserving less against losses and adding withdrawals from reserves back to earnings. (Earlier in the cycle, they were subtracting those withdrawals from earnings.) Because of that, earnings can soar even if a bank’s basic businesses are circling the drain.

The real measure of current health—and of the potential for future profits—then becomes revenue growth. The faster revenue is growing now, the more a bank will add to earnings in the future once the temporary additions to earnings from reserve reductions taper off.

On that basis, JPMorgan Chase’s fourth quarter was good, although not as spectacular as you’d think if you only look at earnings.

For the quarter, earnings came in at $1.12 a share. That was 13% better than the Wall Street consensus and a 47% increase from the fourth quarter of 2009.
Revenue climbed a solid but less stunning 13% to $26.72 billion. That handily beat the $24.44 billion consensus among Wall Street analysts.

As expected, the gain in earnings was driven by a significantly lower provision for credit losses. For example, the company’s retail banking unit earned $708 million for the quarter, compared with a $399 million loss in the fourth quarter of 2009, thanks to a reduction in loss loan provisions to $1.8 billion from $2.5 billion. Credit card services earned $1.3 billion, compared with a $306 million loss in the fourth quarter of 2009 as the bank reduced provisions against future credit card losses by $3.5 billion.

The revenue picture was positive across the company’s business units, but none of the results were enough to knock my socks off. Revenue from fixed-income and equity markets, for example, was $4 billion, up from $3.7 billion in the fourth quarter of 2009 but down from the $4.3 billion of the third quarter of 2010.

The best news for investors waiting for the bank to increase its dividend came from CEO Jamie Dimon, who said that the company’s “fortress balance sheet” ended the year with a Tier 1 capital ratio of 9.8%. That was up from 8.8% last December and 9.5% in September and well above the expected capital requirements for Basel III regulations.

The Federal Reserve is now conducting a new round of stress tests to see when banks will be permitted to raise dividend payments. I expect JPMorgan Chase to be one of the first banks given the go-ahead.

As of January 18, I’m raising my target price for JPMorgan Chase to $58 per share by August 2011 from $55 by June 2011.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did not own shares of JPMorgan Chase as of the end of November. For a full list of the stocks in the fund as of the end of November, see the fund’s portfolio here. I will publish the fund’s holdings as of the end of December in the next few days.