J.P. Morgan profit dinged by tax charge, but strong loan growth shows strong consumer

J.P. Morgan Chase reported a 37% drop in fourth-quarter earnings because of a $2.4 billion one-time charge related to the new tax law. But the bank's loan growth was strong, suggesting the U.S. consumer was in good shape.

The bank said its consumer and community banking segment, which now reaches 61 million households, grew its core loans at an 8% clip. Deposits were up 7%. Consumers' use of credit cards were brisk, too, with card volume and merchant processing totaling $1.2 trillion, up 13%. 

Jamie Dimon, the bank's chairman and CEO, said "2017 was a record year on many measures." He also stressed that the new tax cut law will boost the economy, the bottom lines of middle-class Americans as well as the bank's business going forward.

“The enactment of tax reform in the fourth quarter is a significant positive outcome for the country," Dimon said in a statement. "U.S. companies will be more competitive globally, which will ultimately benefit all Americans."

The bank reported adjusted earnings of $1.76 per share for the final quarter of 2017, topping estimates by 7 cents. Excluding special items, earnings per share were $1.07. The bank's revenue, which rose nearly 5% to $25.45 billion, also topped forecasts.

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J.P. Morgan's net income totaled $4.23 billion, down nearly 40% from $6.73 billion in the same period a year ago. However, if you back out the negative impact from the charge related to the tax law overhaul, the bank said its net income would have been $6.7 billion.

The one-time tax-related charge was not unexpected. Analysts expected the write-down and said investors should instead focus on the economic and business benefits the bank will derive from the government trimming the corporate tax rate to 21% from 35%. 

The bank said its effective tax rate for 2018 will be 19%, which was lower than analysts had forecast.

In a conference call, Marianne Lake, J.P. Morgan's chief financial officer, said the bank is still analyzing how the change to the tax code will affect its business lines, but stressed that all of its stakeholders, ranging from savings and checking account customers to borrowers and business clients, would share in the windfall.

She said the bank is putting together a "long-term sustainable action plan" in response to the tax changes. And while she said much of the tax windfall will fall to the bottom line in 2018, she said the benefits will also be passed along to customers and investors.

The bank could, for instance, include subsidies to low-income loan customers. She said the bank is also likely to share more of its earnings with shareholders via increases in dividend payouts and share buybacks. The bank, she added, will also "lean into" investment opportunities it was already eyeing.

"Ultimately, you can expect some benefits will be passed through to customers and employees over time," she said, adding that there will be "plusses and minuses" across business lines. 

"We haven't seen this movie before," Lake told Wall Street analysts in an hour-long conference call. "We will have to see how it plays out."

The bank will provide a more detailed outline of its plans to deploy freed-up cash at the company's "Investor Day" meeting in New York on Feb. 27.

"There is still uncertainty," Dimon said. "The tax code has to be written and there will be noise going down the road. Don't think that (all the savings) will fall to the bottom line. We will be investing in the future. But we can only go so fast."

J.P. Morgan expects tax reform to add roughly a third of a percentage point, or 0.3%, to U.S. economic growth this year and next.

The bank's fourth-quarter results were hurt by weakness in its trading unit. Overall. its market-specific revenue was down 26%, with fixed-income trading revenue off 34%, and equity market revenue was flat.

However, equity revenue was skewed to the downside by a $143 million loss suffered by the bank due to a margin loan to a single client — Steinhoff International Holdings, a South African retail company that has been hurt by an accounting scandal  — that went bad and needed to be written off. If not for that loss, equity trading revenue would have been up 12%, Lake said.

Lake downplayed the loss, saying the widely diversified bank's corporate and investment banking unit still posted net income of $2.32 billion in the fourth quarter of 2017.

"It was the largest loss in that business we have seen since the financial crisis," the chief financial officer said. "While we are obviously disappointed, even with the loss the unit was still profitable."

The good news is the tax cuts for U.S. employers and workers will help the economy post better growth going forward. 

"We will be better off," Dimon said.