Legal Expenses Are a Drag on J.P. Morgan Earnings

On a GAAP basis, J.P. Morgan posted an EPS loss of $0.17 as a result of $9.2 billion pretax legal expenses, partially offset by a release of $1.6 billion in reserves. The bank’s return on common equity was a negative 2% for the quarter, compared with a positive 16% in the same period a year ago.

There is little question that J.P. Morgan’s legal and regulatory troubles have cost it a lot of money in the past couple of quarters, and the bleeding is only likely to get worse before it slows down. The bank continues negotiating with federal regulators on a settlement related to mortgaged-back assets it acquired from Bear Stearns and Washington Mutual following the collapse of Lehman Brothers in 2008.

The U.S. Department of Justice seeks a settlement of $11 billion from the bank, of which $7.2 billion would be cash and the rest would be doled out as relief to customers. Opinion is divided over whether J.P. Morgan should get a break because it acquired the assets at the urging of the Federal Reserve or the bank should pay up because the acquisitions have been money-makers once the financial crisis ended.

The bank’s CEO said:

While we had strong underlying performance across the businesses, unfortunately, the quarter was marred by large legal expense. We continuously evaluate our legal reserves, but in this highly charged and unpredictable environment, with escalating demands and penalties from multiple government agencies, we thought it was prudent to significantly strengthen them. While we expect our litigation costs should abate and normalize over time, they may continue to be volatile over the next several quarters.

J.P Morgan increased its Basel I Tier 1 common ratio to 10.5% in the third quarter and estimates that its Basel III Tier 1 common ratio is about 9.3%.

The bank did not offer guidance in its press release, but the consensus estimates call for fourth-quarter EPS of $1.31 on revenues of $24.09 billion. The EPS estimate for the 2013 fiscal year is now $5.72.

Shares are trading about 2.6% higher in the premarket Friday morning, at $53.90. The current 52-week range is $38.83 to $56.93. Thomson Reuters had a consensus analyst price target of around $62.40 before these results were announced.