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JPMorgan shares fall 5% after CFO reduce forecast for "headwinds" together with wage inflation

JPMorgan Chase shares fell on Friday after the bank posted its smallest quarterly profit in almost two years and the lender's CFO lowered its forecast for company-wide yields.

Here are the numbers:

Earnings: $3.33 per share versus an estimated $3.01, according to Refinitiv. Revenue: $30.35 billion versus an estimated $29.9 billion.

Higher-than-expected spending drove fourth-quarter profit down 14% to $10.4 billion, while revenue was nearly flat at $30.35 billion. JPMorgan said in its press release that it had a net gain of $1.8 billion from the release of reserves for never incurred credit losses; Excluding that 47 cent per share increase, earnings would have been $2.86 per share.

The bank's shares fell 5.3%.

CFO Jeremy Barnum told reporters on a conference call that management anticipates "headwinds" from higher spending and falling earnings on Wall Street, which would cause the company's returns to fall from recent years. That means the bank is likely to miss the 17% target for the company's return on investments, he said.

"Over the next year or two, we expect to earn slightly below that target as headwinds are likely to outpace tailwinds," Barnum said, adding that the target is still valid "in the medium term."

JPMorgan's spending will rise 8% to about $77 billion in 2022, Barnum added, driven by "inflationary pressures" and $3.5 billion in investments.

When asked if a tight labor market is forcing JPMorgan to pay its employees more, Barnum replied, "It's true that labor markets are tight, that there is some wage inflation, and it's important for us to attract and retain employees best talent and competitive pay for performance."

Still, the bank will benefit from the rising interest rates and credit growth that have lured investors into the financial industry in recent months. Net interest income is expected to reach around $50 billion this year, a gain of $5.5 billion from 2021 on expected interest rates and "high single-digit" credit growth, Barnum said.

After setting billions of dollars aside for loan losses early in the Covid pandemic, JPMorgan benefited as it steadily released funds as borrowers held up better than expected. Still, CEO Jamie Dimon has said he doesn't see accounting value as a core component of business results. Even accounting for the boost, JPMorgan posted the smallest earnings hit in the past seven quarters.

"The economy continues to perform reasonably well despite headwinds related to the Omicron variant, inflation and supply chain constraints," Dimon said in the release. "Credit remains healthy with exceptionally low net charge-offs and we remain bullish on US economic growth."

While company-wide revenue rose 1% in the fourth quarter as a slowdown in markets was offset by robust investment banking fees, noninterest expenses rose 11% to $17.9 billion on rising compensation costs, the bank said. That was more than the $17.63 billion estimate by analysts polled by FactSet.

JPMorgan executives have previously discussed the need to invest in technology and pay employees after a booming year on Wall Street; Still, analysts might ask management about spending trends this year.

"JPMorgan's results were surprisingly weak, hampered by unusually poor spending management," Octavio Marenzi, CEO of consulting firm Opimas, said in an emailed statement.

Government stimulus programs during the pandemic left consumers and businesses blushing, resulting in sluggish credit growth, prompting Dimon to say last year that credit growth was "challenged." However, analysts have pointed to a rebound in the fourth quarter, driven by demand from businesses and credit card borrowers.

JPMorgan's chief operating officer, Daniel Pinto, said during a conference last month that fourth-quarter trading income is heading for a 10% decline, driven by a decline in fixed-income activity from record levels.

Trading revenue slowed a little more, falling 11% to $5.3 billion in the quarter, the bank said. This was largely due to a slowdown in bond trading desks. Investment banking helped with a 37% increase in fees.

The bank had to pay $200 million in fines last month to settle allegations that its Wall Street division allowed workers to use messaging apps to circumvent record-keeping laws.

Analysts may also ask the bank about the impact of its recent decision to limit overdraft fees. JPMorgan said last month it would give customers a grace period to avoid the penalty fees, a move that, along with other changes, will have a "not inconsiderable" impact on revenue.

Shares of JPMorgan are up 6.2% this year ahead of Friday, lagging the 11.6% rise in the KBW Bank Index.

This story evolves. Please check back for updates.

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