It looks like a good news, bad news day for J.P. Morgan. Overall earnings beat expectations, but net income from investment banking was $1.9 billion, down 7 percent from the prior year. These results reflected lower net revenue and a provision for credit losses compared with a benefit in the prior year, largely offset by lower non-interest expense, driven by lower compensation.
The investment banking headcount rose by 846 from Q1 to Q2, not counting the recent departures of four highly paid executives in the CIO office, including one whale, who figured into a trading loss that will eventually amount to $5.8 billion, according to Chief Financial Officer Douglas Braunstein who gave that figure on this morning's earnings call. Bank executives said others in the CIO office have been reassigned, and more people in the chief investment office will be let go.
Total headcount in investment banking in Q2 stood at 26,553, which was 1,163 lower than the same quarter last year.
Investment banking fees were $1.2 billion (down 35 percent), which consists of debt underwriting fees of $639 million (down 26 percent), equity underwriting fees of $250 million (down 45 percent) and advisory fees of $356 million (down 41 percent).
Combined fixed income and equity markets revenue was $5 billion, down 10 percent from the prior year. Credit Portfolio reported revenue of $544 million.
Non-interest expense was $3.8 billion, down 12 percent from the prior year, driven by lower compensation expense. The ratio of compensation to net revenue was 33 percent, excluding DVA. Pay per head for the first half of the year was $185k, down 12% on the same period of 2011.
Excluding the impact of DVA, fixed income and equity markets combined revenue was $4.5 billion, down 15 percent from the prior year, primarily reflecting the impact of weaker market conditions, with solid client revenue. Excluding the impact of DVA, Credit Portfolio net revenue was $230 million, driven by net interest income on retained loans and fees on lending-related commitments.
The provision for credit losses was $21 million, compared with a benefit in the prior year of $183 million. The ratio of the allowance for loan losses to end-of-period loans retained was 1.97 percent, compared with 2.10 percent in the prior year.
Restatement of Q1 Earnings
The bank also said that it was restating its first quarter earnings due to the trading loss by reducing its net income for the first quarter by $459 million because it had discovered information that “raises questions about the integrity” of values placed on certain trades. In speaking to investors on this morning's conference call, CEO Jamie Dimon said the trading loss "had shaken the firm to its core."
Dimon added that "it's silly to think you will never make mistakes. We made a mistake."
The trading loss led to a loss in investment confidence in J.P. Morgan, as reflected in the estimated $25 billion lost in market value since May 10th.