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JPMorgan’s 2Q13 10-Q Details New Regulatory Issues and More Potential Legal Expenses
Posted by: QuantShare (IP Logged)
Date: September 9, 2013 09:00AM
JPMorgan’s 2Q13 10-Q filing reported on the firm’s regulatory issues in more detail disclosing the potential for additional loss reserves of up to $6.8 billion. The firm’s 2Q13 earnings results were positive with year-over-year revenue up 13%, net income up 31% and earnings per share up 32%. However, the quarter’s disclosures indicate that regulatory issues and litigation expenses are going to continue to be a key factor for the company in the near term.
Noninterest expenses, where a large portion of JPMorgan’s litigation expenses are reported, were $15.87 billion in second quarter 2013. This was up from $15.42 billion in second quarter 12 and down from $16.05 billion in fourth quarter12.
At the height of the London Whale Episode in third quarter 2012 noninterest expenses were $15.37 billion and credit loss provisions were $1.79 billion. While credit loss provisions have been decreasing significantly since the London Whale Episode, the firm’s disclosure of regulatory issues indicates noninterest expenses could still see substantial gains from future legal expenses.
In the firm’s second quarter 2013 10-Q management cited six regulatory issues at the forefront of litigation concerns for the company. These issues were outlined in the firm’s executive overview and are included below.
1. Examination requests from several states relating to unclaimed property and the Firm’s compliance with escheatment laws.
2. Requests for information from the U.S. Attorney’s Office for the District of Connecticut, subpoenas and requests from the SEC Division of Enforcement, and a request from the Office of the Special Inspector General for the Troubled Asset Relief Program to conduct a review of certain activities, all of which relate to, among other matters, communications with counterparties in connection with certain mortgage-backed securities transactions.
3. A request from the SEC Division of Enforcement seeking information and documents relating to, among other matters, the Firm’s employment of certain former employees in Hong Kong and its business relationships with certain clients.
4. A request for information from the New York State Department of Financial Services relating to forbearance practices for loans serviced by the Firm that are secured by residential property in Superstorm Sandy FEMA-designated counties in New York State.
5. A request from the New York Attorney General’s Office seeking documents and information relating to, among other things, the use of services and data provided by consumer credit screening companies and the Firm’s compliance with the Fair Credit Reporting Act, the Equal Credit Opportunity Act and other laws.
6. A request from the U.S. Department of Labor for documents and information relating to the Firm’s foreign exchange practices pursuant to the Employee Retirement Income Security Act of 1974.
Under Note 23 – Litigation in the firm’s second quarter 2013 10-Q the firm further discloses a comprehensive outline of its legal proceedings. This comprehensive list includes ongoing credit default swap investigations, credit and debit card interchange fee litigation, proceedings involving the Lehman Brothers bankruptcy, investigations into the process for submitting interest rates used in determining the London Interbank Offered Rate, ongoing investigations into the firm’s offerings of mortgage-backed securities and mortgage foreclosure-related investigations, among many other proceedings currently underway. In second quarter 2013 the firm reports paying litigation expenses of $678 million and accumulating total litigation expenses in the first half of the year of $1.0 billion in relation to this ongoing litigation.
While ongoing litigation has been a factor for the firm specifically over the past four quarters, JPMorgan has still managed to continually grow net income and improve its net profit margins. Second quarter 2013 net income grew 31% from second quarter 2012. Meanwhile, net profit margins have grown steadily over the past four quarters increasing from 21.7% in second quarter 2012 to 25.0% in second quarter 2013.
The firm’s stock price has also continued to trend up with the improvement in earnings. Since the height of the London Whale Episode at the end of third quarter 2012, JPMorgan’s stock has gained 45.87%, outperforming the Dow Jones Industrial Average by 29.38%. Other banking stocks in the Dow 30 are also undergoing similar regulatory proceedings. Bank of America, for example, is also dealing with much regulatory litigation resulting from activities undertaken during the financial crisis.
For investors this means a great deal of volatility still remains on the horizon for banking stocks. In the second half of the year investors should continue to track how these legal proceedings evolve for JPMorgan while still taking into account the overall effect on the firm’s bottom line.
Disclosure: No holdings.
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Stocks Discussed: JPM,