NEW YORK--(BUSINESS WIRE)--JPMorgan Chase & Co. (JPM) reported record net income for 2014, although Fitch Ratings believes 4Q'14 earnings were down 5.2% from the prior year (adjusting for legal expenses, FVA/DVA implementation and adjustments, and non-recurring gains recorded in 4Q13). On a core basis, earnings were down due largely to an increase in credit costs, lower mortgage revenues, and continued yield pressure, offset to some extent by modest expense improvements.
However, credit performance continued to exceed Fitch's expectations, particularly in card, where JPM recorded $150 million of reserve releases. Core loan growth was 8%, and the bank's return on tangible common equity was 11%, which is below the long-term target of 15%-16%.
Items of note in the quarter included approximately $1.1 billion of legal expenses related largely to foreign exchange settlement losses.
Adjusting for FVA/DVA, net income in corporate and investment banking (CIB) was $1.1 billion in 4Q'14, down from $2.2 billion in the prior year, given the impact of legal expenses noted above and a 7.3% decline in net revenue. The decline was driven by lower revenue in fixed income markets, equity underwriting, and lending, partially offset by record debt underwriting revenue and stronger equity markets revenue. The 22.8% drop in fixed income markets revenue would have been closer to 14% excluding the impact of the sale of the Physical Commodities and Global Special Opportunities Group businesses. Markets revenue is expected to continue to be impacted by business simplification initiatives in 1Q'15. CIB reported average VaR of $40 million for the quarter, which was down slightly from $42 million in 4Q'13. Fitch expects segment VaR to rise with increased market volatility. FVA/DVA was a loss of $48 million in the quarter, although management indicated that refinements to FVA/DVA resulted in an additional charge in the quarter of approximately $200 million.
Net income in the Consumer and Community Banking (CCB) segment, was down 11% from 4Q'13, as an increase in provision expenses and lower mortgage revenues were only partially offset by improved operating efficiencies. The segment overhead ratio was 59% for the quarter compared to 64% a year ago. Mortgage production exceeded Fitch's expectations and bank guidance due to better performance on revenues and revenue margins. Production income, excluding repurchase benefits, was modestly positive and up $56 million from the prior quarter, as origination volume rose 8.3% from 3Q'14. JPM believes it gained about 100 basis points of market share in the quarter. Production expense continued to improve, and Fitch expects further efficiency gains in 2015.
Pre-tax earnings in the mortgage servicing business improved modestly from 4Q'13 as lower expenses more than offset lower revenue and lower MSR risk management income. Total servicing expenses returned to a downward trajectory after growing in 3Q'14 due to investments in business improvements but remained above the prior low of $552 million recorded in 2Q'14 and management's original year-end target of approximately $500 million. Fitch expects segment expenses to continue to improve in 2015.
Earnings in the real estate portfolio continued to be impacted by higher provision expenses, but a continuation of strong credit trends drove a $150 million reserve release in the non-credit impaired portfolio in the quarter.
Card segment fundamentals remained relatively solid, although quarterly performance was impacted by non-core portfolio exits, lower reserve releases, and spread compression. Loan growth continued to gain momentum; rising 2.6% annually, on average, in the quarter, while purchase volumes remained above the industry average, with 9.8% growth year over year. Credit performance continued to exceed Fitch's expectations, with $150 million of reserve releases and a net charge-off rate of 2.48% in the quarter, adjusting for the portfolio exits. Despite the fact that Fitch believes credit metrics to be at unsustainable lows, management expects further improvements in 2015. JPM also expects the net revenue rate to be at the low-end of its 12% to 12.5% targeted range in 2015, compared to an adjusted rate of 12.2% in 4Q'14.
Commercial Banking (CB) remains a very steady contributor to JPM earnings. Segment performance was down from the prior year, but excluded about $100 million of gains associated with a lending-related workout recorded in 4Q'13. Absent that, loan growth and lower provisions offset yield compression. Average loan growth of 8% was driven by continued strength in commercial real estate and growth in C&I loans.
Asset Management (AM) earnings remained solid, but were impacted by higher expenses associated with investments in infrastructure and controls. Assets under management (AUM) were a record $1.7 trillion at quarter-end.
Management indicated that the bank's exposure to energy was about $46 billion in loans, with about 2/3 booked in CIB and 1/3 booked in CB, consisting largely of asset-based loans. Approximately 17% of the exposure is to investment grade borrowers. While reserves may increase over the near-to-medium-term, given depressed energy prices, management does not believe any material changes to net charge-off rates are imminent. Overall, Fitch believes JPM's loan exposure to energy is relatively modest.
JPM's Basel III Tier 1 Common equity (CET1) ratio was flat in the quarter, at 10.1%. Management believes the ratio will increase by 50 basis points or more in 2015. The supplementary leverage ratio (SLR) grew 10 basis points at the firm level and 20 basis points at the bank level, to reach 5.6% and 5.9%, respectively, at year-end. JPM believes that the estimated minimum total loss absorbing capacity (TLAC) represents about 15% of Basel III risk-weighted assets, based on regulatory proposals. Fitch regards JPM's capital levels to be consistent with its current ratings and would expect the bank to achieve full compliance with all regulatory requirements, well ahead of required implementation.
JPM repurchased $1.5 billion of common equity during the quarter, which leaves about $2 billion of authorization based on the annual CCAR process. Dividends per share were $0.40, which equates to a payout ratio of approximately 33.6% on a fully diluted basis. The dividend payout was about 29.9% for the year.
From a liquidity perspective, JPM reported to be compliant with U.S. final LCR guidance and Basel final NSFR. The bank's portfolio of high-quality liquid assets was $626 billion, which was up from $522 billion a year ago.
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