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Why Is Expense Control Key to JPMorgan’s Earnings?

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Apr. 5 2016, Updated 10:08 a.m. ET

 JPMorgan’s commitment to cost-cutting

Global volatility has rocked financial markets and pressured their margins during the first quarter of 2016. Banks (KBE) have been forced to realign their cost structures in order to remain profitable and contain rising costs in an uncertain and volatile environment.

JPMorgan Chase (JPM) is committed to cost-cutting and optimizing its capital levels. Banks such as Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) have repeatedly been criticized for their inability to control overhead expenses.

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In 2015, JPMorgan reported exceptional operational performance. Non-interest expenses have continued to decline 7% year-over-year to $14.3 billion. Litigation expenses for the quarter declined substantially to $99 million. This includes a $318 million benefit from the government related to its acquisition of Washington Mutual. In the same period last year, the company reported legal expenses of $990 million. The number of employees also declined by 3% to 234,598.

Wall Street analysts keep a close eye on banks’ overhead ratios. This ratio is especially important in the upcoming results, as low interest rates and global events have eaten into banks’ revenues. Overhead ratio is a measure of operating expenses as a percent of net revenue. It shows how revenues fuel a bank’s operating expenses. A lower percentage is better since it means lower expenses compared to revenues.

For 4Q15, JPMorgan reported an overhead ratio of 60%, which was lower than 65% reported in the previous quarter. The decline was primarily attributable to lower litigation-related expenses during the quarter.

Now let’s look at the health of JPMorgan’s shareholder rewards.

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