Tomahawk, WI 11/01/2013 (BasicsMedia) – JPMorgan Chase & Co. (NYSE:JPM) is a money center bank that is located in New York City, New York.  The bank has a market cap of $198.8 billion, and it stock price is around $53. With assets of $2.39 trillion in assets, J P Morgan has the distinction of being the largest money center bank in the United States. The only other bank that approaches J P Morgan in terms of asset size is Bank of America Corp (NYSE:BAC) which controls $2.17 trillion in assets.

Until recently J P Morgan was not only the largest U. S. bank, it was the most respected. The bank was respected because it had not had a quarterly loss since 2004 (just before Jaime Dimon became the banks CEO), and also because it was one of the few large banks that had not gotten burned for by the sub-prime mortgage debacle or had been forced to pay a settlement (like Bank of America, Citigroup Inc (NYSE:C)Wells Fargo & Co (NYSE:WFC) or Ally Financial Inc. (ALFI) to the Federal Government for engaging in misleading mortgage practices.

That is why investors were shocked when the bank reported a quarterly loss for the third quarter of 2013.  The bank reported a loss of $380 million down from a profit of $5.17 billion in the third quarter of 2012.  The banks revenues fell to $23.88 billion slightly lower than the $25.1 billion that it reported in the second quarter of 2012. During the earnings call the banks CEO Jamie Dimon said, “I wish we could reduce the uncertainty for investors,”  He then went on to say “While we expect our litigation costs should abate and normalize over time, they may continue to be volatile over the next several quarters,”

The first major litigation cost became public on October 20th, when J P Morgan announced a $13 billion agreement with the U S government to resolve civil disputes over mortgage based bond sales.  The agreement was the largest fine paid by any bank in regards to the misleading sales of mortgage backed securities.

While the settlement provided some insight into the banks future legal cost, the potential cost from its remaining legal challenges was still not clear. Some of the banks most pressing future legal challenges include:

A charge that the bank hired the children of senior Chinese government officials, in order to get business in China.

A charge that the bank fraudulently sold credit cards, and then made errors in its debt collecting lawsuits.

The potential of future liability, in the Bernie Madoff Ponzi scheme.

Even with so many legal challenges there is some good news in regard to J P Morgan’s legal cost. The good news is that during the earnings announcement J P Morgan disclosed that the bank had set aside $23 billion for litigation expenses. While there is no guarantee that $23 billion will cover all of the banks future legal expense, it should protect it from the type of write off and loss that it had in the third quarter.

Positive News in J P Morgan’s Future

Despite reporting a quarterly loss, J P Morgan’s Mortgage Banking had net income was $705 million up 13% from last year.  The revenues from the mortgage banking business was $2 billion down 13% from last year, but the increase in profit was driven by lower provisions for credit losses and noninterest expenses. The reason that mortgage revenues were down was because during 2013 interest rates rose from historic lows of 3.5% to an average of 4.32%.

Negative news in J P Morgan’s Future

In the third quarter, J P Morgan’s revenues and earnings were both lower due to rising interest rates. The most recent financial data indicated that the job market was not improving, and therefore the Federal Reserve would not be changing its policy towards stimulating the economy. Therefore in the future the bank’s mortgage originations (one of the company’s largest revenues drivers) are likely to continue to slow down. Since there have been no indicators that interest rates will go down, J P Morgan will soon lay off 15,000 employees most of who will be from its mortgage banking division.

In addition, the banks third quarter net interest margin fell again, this time from 2.43% to 2.2%.  The lower net interest margins are likely to cut the banks earnings in the upcoming quarters.

Conclusion

After so much bad news, the bank’s stock might have crashed. However, while the bank may have suffered its first quarterly loss in almost a decade, by writing off it potential legal cost and not hiding its true financial situation it displayed a high level of respectability. Perhaps that is why investor’s faith in J P Morgan was not shaken. Since the announcement of the loss, the bank’s stock price has moved lower by only a few pennies.

J P Morgan’s stock is a buy for conservative investors. The stock price has increased by over 25% in the last year despite the London Whale scandal and the $13 billion settlement for the sale of subprime mortgages. It has a dividend yield of 2.9% and it seems to be relatively crash proof even in the face of bad news.

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