JPMorgan (JPM) Posts Q2 Results, Restates Q1 and Shutters CIO Synthetic Group

July 13, 2012 8:07 AM EDT
Shareholders in JPMorgan (NYSE: JPM) Friday are responding to second-quarter results which included details into the bank's Chief Investment Office trading losses. Additionally, JPMorgan said first-quarter results will be restated.

The stock is indicated for a higher open. Shares last traded at $34.60, up more than 1 percent from Thursday's close.

Quarterly revenue was down 16 percent from $27.41 billion during the same quarter last year to $22.89 billion. Sales came in at $26.76 billion during the first quarter of 2012. Analysts had been expecting JPMorgan to report total sales of $21.90 billion.

Net income on a managed basis was down about 8.7 percent to $4.96 billion. Earnings per share were down 4.7 percent from $1.27 in the year-ago quarter to $1.21.

Earnings were impacted by a number of adjustments, including $0.69 per share after taxes related to the CIO trading losses. The bank saw a $0.16 per share benefit from securities gain within the CIO unit. In addition, a $0.33 per share benefit came from reduced loan loss reserves (mostly mortgage and credit card), a $0.12 per share gain from debit valuation adjustments in the Investment Bank, and $0.09 per share was added amid an expected full recovery on a Bear Stearns-related first-loss note in Corporate.

Given the above adjustments, JPMorgan's $1.21 per share on the bottom line was not comparable to the Wall Street consensus estimate looking for earnings of $0.72 per share.

Some more color related to progress in the CIO segment:
  • significantly reduced total synthetic credit risk in CIO;
  • substantially all remaining synthetic credit positions transferred to the Investment Bank;
  • CIO synthetic credit group closed down; and
  • conducting extensive review of CIO trading losses, CIO management completely overhauled.
JPMorgan's Chairman and CEO, Jamie Dimon, offered some commentary: "Importantly, all of our client-driven businesses had solid performance. However, there were several significant items that affected the quarter’s results – some positively; some negatively. These included $4.4 billion of losses on CIO’s synthetic credit portfolio, $1.0 billion of securities gains in CIO and a $545 million gain on a Bear Stearns-related first-loss note, for which the Firm now expects full recovery. The Firm’s results also included $755 million of DVA gains, reflecting adjustments for the widening of the Firm’s credit spreads which, as we have consistently said, do not reflect the underlying operations of the Firm. The Firm also reduced loan loss reserves by $2.1 billion, mostly for the mortgage and credit card portfolios. These reductions in reserves are based on the same methodologies we have used in the past – the good news is that these reductions reflected meaningful improvements in delinquencies and estimated losses in these portfolios. We continue to maintain strong reserves."

The bank also announced it will restate its previously-filed interim financial statements for the first quarter of 2012 by $459 million. The restatement will have no effect on total earnings or revenues for the company year-to-date, according to JPMorgan. The restatement relates to valuations of certain positions in the synthetic credit portfolio in the firm’s CIO.

Traders in CIO were expected to mark their positions where they would expect to be able to execute in the market. In this instance, while the positions were within thresholds established by an independent valuation control group within CIO, the firm has recently discovered information that raises questions about the integrity of the trader marks and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses in the portfolio during the first quarter.

JPMorgan said it is no longer confident the trader marks reflected good faith estimates of fair value at quarter end. The bank will remark the positions utilizing external "mid-market" benchmarks, adjusted for liquidity considerations.

The bank said previously filed financial statements for the 2012 first quarter should no longer be relied upon. The restated first-quarter results will be filed as soon as practical but no later than the filing of financial statements for the second quarter.

JPMorgan said all CIO synthetic group managers have left the firm and they will seek to clawback compensation paid to the group.

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