Jeremy Glaser: For Morningstar, I am Jeremy Glaser.
J.P. Morgan's quarterly results show that they're near the top of the United States' large banks. Here to give her take is senior banking analyst, Jaime Peters.
Jaime, thanks for joining me today.
Jaime Peters: Good afternoon.
Glaser: Jaime, can you share with us your take on the quarter?
Peters: J.P. Morgan actually has a very strong core fundamental earnings, and they are starting to shine through. The company has a strong investment bank, a strong retail franchise, and we're finally starting to see those earnings come to the bottom line because we're seeing credit costs finally come down.
Glaser: Could you talk a little bit about the kind of provisions that they had to take against their loan book? I know that they still have lot of those Washington Mutual loans from that acquisition. How is that going?
Peters: It's not going so well, actually. They actually took a $2 billion extraordinary provision for the Washington Mutual loans because when they originally did the credit impairment associated with it, they were too low. They had expected improvement by this time, and losses are still remaining high.
On the other hand, on their own portfolio, Chase book, they've seen improvement in credit cards, they've seen improvement in auto loans, and as a result they were able to release reserves in those types of categories, which pretty much offset most of the reserves from the Washington Mutual loans. As a result, they actually did a fairly decent job. You actually saw credit reserves come down slightly. They're still at elevated levels for historical situations, but they are doing much better.
Glaser: So you don't think that the WaMu book is going to drag down earnings over the long-term for J.P. Morgan?
Peters: Hopefully, this is the last time we ever hear about Washington Mutual loans. The $2 billion should be sufficient to get us through this cycle. Assuming, we don't have, of course, a double-dip or a real recession within the mortgage market, the home loans start dropping--home prices start dropping significantly.
Glaser: Speaking of mortgages, one of the big stories recently has been about mortgage documentation and about the so-called robo-signers. How is J.P. Morgan handling this potential litigation that could come from their mortgage servicing?
Peters: Back in the third quarter, the company took $1 billion of litigation reserve associated with basically the robo-signing scandal, and this quarter they said they have a $1.5 billion litigation reserve associated with private-label putbacks. So what's been happening is that J.P. Morgan and other banks originated and sold mortgages to third parties like the government-sponsored entities, Fannie Mae, Freddie Mac, as well as private investors. The government-sponsored entity putbacks...when the mortgage does not form well, the government sponsored-entities have the ability to say that you have to re-buy these loans.
That story is pretty much done with this quarter. What we do have now, though, is private-label ones, where J.P. Morgan went out and securitized billions of dollars of mortgages, and they are now having these investors start to come back at them. This is going to result in a lot of lawsuits, honestly. We're seeing this at Bank of America right now. They are really in the thick of it, and J.P. Morgan expects to be in it pretty soon. It's going to take years to resolve. They've got $1.5 billion of reserves in order to try to fight these battles. It's going to end up being a loan-by-loan battle.
Glaser: Jaime, one of the questions we hear a lot is when is J.P. Morgan going to raise their dividend. Is there anything in this quarterly release that points to a potential dividend raise in the near future?
Peters: Well, Jamie Dimon actually came out earlier this week talking at his company's health-care conference suggesting that they are going to raise their dividend between $0.75 and $1 annually, hopefully starting in the second quarter. We kind of heard reiterations about that here in the conference call that we had this morning, and what's really going to happen is right now we're expecting $0.25 a quarter, but it's not going to happen until the second quarter because J.P. Morgan has submitted its stress test to the Federal Reserve and will need to get permission to raise that dividend and start repurchasing shares. So we do expect it sometime in the second quarter.
We also, by the way, expect maybe a second dividend raise towards the end of the year because they have to be able to be up to 30% according to the current Fed guidance, and that means that they would actually have room to maybe do one or two dividend raises this year.
Glaser: Great. Jamie, thanks so much for your insights today.
Peters: Thank you.
Glaser: For Morningstar.com, I'm Jeremy Glaser.