Why Davidson Kempner eliminates position in JPMorgan Chase

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Davidson Kempner and JPMorgan Chase

Davidson Kempner Capital added new positions in Ally Financial Inc. (ALLY), WL Ross Holding (WLRH), Newell Rubbermaid (or NWL), and B/E Aerospace (or BEAV). It exited positions in Equity Commonwealth (EQC), Omnicom (OMC), and JPMorgan Chase & Co. (JPM).

Davidson Kempner exited a position in JPMorgan Chase & Co. (JPM) that accounted for 1.29% of the fund’s 1Q14 portfolio. This position was initiated in 1Q14. Market Realist reported that Appaloosa Management also sold its position in the banking giant last quarter.

Overview of JPMorgan Chase

JPMorgan Chase is a leading global financial services firm. It has $2.5 trillion assets. It has operations worldwide. It provides services in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, and asset management.

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In 1Q14, JPMorgan’s shares fell because results were below Wall Street expectations. In a regulatory filing back in May, the bank said that it expects 2Q14 fixed-income and equity trading revenue to be down “~20%+/- versus 2Q13 reflecting a continued challenging environment and lower client activity levels.”

Results beat estimates despite drop in profits

JPMorgan’s latest 2Q14 results beat estimates. However, net income was down to $6 billion—from $6.5 billion in 2Q13. The earnings per share (or EPS) was $1.46—compared to $1.60 in 2Q13. Revenue for the quarter was $25.3 billion—down 2% compared to last year.

The decrease in net income from 2Q13 was driven by a higher provision for credit losses and lower net revenue. The decline in net revenue was mainly due to lower principal transactions revenue, lower mortgage fees, and related income. The company said its results reflected strong underlying performance despite “industry-wide headwinds in Markets and Mortgage.”

Mortgage originations down 66%

Under segments, Consumer & Community Banking net income was $2.4 billion for 2Q14—a decrease of $646 million, or 21%, compared to last year. The decrease was due to a higher provision for credit losses and lower net revenue. The provision for credit losses was $852 million—compared to a benefit of $19 million last year.

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Non-interest expense was $6.5 billion—a decrease of 6% from last year. The decrease was driven by lower Mortgage Banking expense. It was partially offset by higher Credit Card expense. Mortgage originations were $16.8 billion—down 66% from last year and 1% from last quarter. Net revenue was $11.4 billion—a decrease of 5% compared to last year.

Corporate & Investment Bank net income was $2 billion—down 31% compared to $2.8 billion last year. This reflected lower revenue and higher non-interest expense.

Commercial Banking net income was $658 million—up 6% compared to last year. Asset Management net income was $552 million—a 10% increase from last year.

JPM’s Corporate/Private Equity net income was $369 million—compared to a net loss of $552 million last year.

In the earnings release, CEO Jamie Dimon said that “Toward the end of the second quarter, we saw encouraging signs across our businesses including an uptick in wholesale utilization, strengthening pipelines in our commercial and business banking segments, and some improvements in markets activity.” He added that the company has confidence in the economy’s long-term growth. He also said that “Consumers, middle market companies, and corporations are in increasingly good financial shape and the labor market is showing steady improvement.”

Agrees to sell stake in private equity arm

According to news reports, JPMorgan agreed to sell part of its stake in its private equity business—One Equity Partners—to Lexington Partners LP and Carlyle Group LP’s AlpInvest Partners.

Read our series Must-know: An overview of the banking sector to understand the risks and rewards associated with the sector.

You can read more insights on the financial sector from BlackRock’s Global Chief Investment Strategist Russ Koesterich. You can read his series “3 reasons financial stocks offer investors good value.”

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