JPMorgan faces up to uncertainties

JPMorgan Chase kicked off banks’ earnings season with stronger underlying results, but the largest US bank is menaced by shadowy uncertainties: cyber attacks, capital charges and the health of chief executive Jamie Dimon.

For all the focus on “underlying” results – chief financial officer Marianne Lake used the word six times on an earnings call with analysts – it is difficult for investors to peer into what a normal future might look like.

One positive was fixed income trading income, a big profit driver at JPMorgan, which rose 2 per cent year-on-year to $3.51bn. Overall, revenue from its corporate and investment bank rose 7 per cent, boosted by improved advisory and equity underwriting business.

But JPMorgan’s net income of $5.6bn was still slightly below estimates, depressed by a $1bn legal charge driven by an impending penalty from an investigation into allegations that JPMorgan – along with at least 14 other banks – manipulated foreign exchange markets.

Investors have been living with elevated legal charges for some time and believe they should now begin to dissipate. The future is clouded by new threats.

JPMorgan was the institution hit hardest by the round of attacks in the summer, which led to the theft of personal information, but not account numbers or passwords, of its customers from 76m households.

“We think cyber is a big deal,” said Mr Dimon. “It’s going to be an ongoing battle and unfortunately battles will be lost. We lost one. We’re not making excuses for it. It was fortunately not a very damaging one.”

Mr Dimon predicted the issue would become a “world trade” battle. China, Russia and Iran are accused by cyber security workers of perpetrating some attacks on US institutions.

“You’re not going to have nations stealing IP [intellectual property] and thinking they’re going to avoid it being dealt with in some of the courts of the world,” he said.

The theft from JPMorgan – in an attack where several US institutions, including Fidelity, were targeted – has increased fears about the vulnerability of US financial companies.

It’s going to be an ongoing battle and unfortunately battles will be lost. We lost one

It has also raised questions about the response. The largest banks each employ several thousand people to guard their networks against breaches, according to bank executives. Mr Dimon said he estimated the company would have to double its spending to counter the threat over the next four to five years.

Higher capital charges are hardly new. But regulators’ unrelenting zeal to drive banks to stronger balance sheets is worrying shareholders and analysts who want to see bigger buybacks and better returns on equity.

“Every year we come in thinking this is the end, and the regulators will be satisfied by capital or the liquidity levels, every time they pull the rug out from further underneath them,” said Chris Mustascio, analyst at KBW. “We’re not done yet. [Returns on equity] – they’re going to continue to be ratcheted down.”

Ever since the financial crisis, the amount of capital regulators require of banks has risen. Now JPMorgan is braced for another set of demands, with regulators due to specify a new higher target in the coming months.

“There’s no need for us to overreact,” insisted Marianne Lake, chief financial officer. She said JPMorgan would balance reaching the new regulatory demands, “which we’re not going to guess at this moment, against the desire to continue to deliver capital to shareholders in the form of increased dividends and repurchases”.

JPMorgan watchers are also left waiting to see Mr Dimon return to health after receiving treatment for throat cancer. After a string of high-level executive departures, the chief executive is seen as more vital than ever to the bank; analysts at Morgan Stanley put his health as their number one question.

Mr Dimon, who has led JPMorgan since 2006 and last week made his first public appearance since the bank disclosed his illness in late June, said his prognosis remained “excellent” and he was contemplating international travel for the first time in several weeks.

“I never stopped working,” he said. “I’m starting to build back up to a full schedule. We will be monitoring it. I’m happy that the treatments are over.”