JP Morgan Chase Profits $3.6 Billion...But Are They Still Doing Loan Mods?

JPMorgan Chase Reports Strong Profit of $3.6 Billion


A year after accepting a bailout from Washington, a resurgent JPMorgan Chase reported a second consecutive quarter of surprisingly strong profit on Wednesday, solidifying its position at the pinnacle of American finance.

JPMorgan’s results — $3.6 billion in profit for the third quarter — fanned hopes on Wall Street that the nation’s banking industry was entering a new period of prosperity, despite lingering troubles. The robust showing from JPMorgan, and tentative signs that consumer loan losses might soon peak, has set the pace for other big banks that will report results in coming days.

JPMorgan’s profit was powered by its investment banking division, where earnings more than doubled from the period a year earlier thanks to trading in the fixed-income markets and a flurry of deals. The results from that unit more than offset the bank’s losses on credit card loans and home mortgages, which continued to rise as consumers struggled with a weak economy.

The earnings seemed to light a fire under Wall Street. The Dow Jones industrial average rose 144.80 points, closing above 10,000 for the first time in more than a year.

Although the recession weighed heavily on its businesses, JPMorgan appeared to be taking advantage of the financial crisis to leapfrog investment banking rivals in the rankings and expand its consumer lending franchise. Meanwhile, it added another $2 billion to its consumer credit reserves for future losses, bringing the total amount it has set aside to $31.5 billion.

Net income rose to 82 cents a share, far surpassing analysts’ estimates for the third quarter. The bank reported a profit of $527 million, or 9 cents a share, in the third quarter of 2008.

“The revenue growth was very impressive,” said Anthony Polini, an analyst at Raymond James & Associates. “They’re benefiting from a turn in the economy, and they’re asserting their dominance.”

The results also reflected the broader rebound in once-stymied financial markets, with companies again issuing stock, raising money from bond markets and signing merger deals. After being forced to take huge write-downs on the value of some its investment banking assets a year ago, JPMorgan said it booked about a $400 million gain on the sale of mortgage securities and buyout loans.

Jamie Dimon, JPMorgan’s chairman and chief executive, said the earnings reflected broad growth across several of the bank’s business lines but gave only a cautious outlook. “While we are seeing some initial signs of consumer credit stability, we are not yet certain that this trend will continue,” he said in a statement.

Consumer loss rates remain high, but there were several upbeat signs in the bank’s numbers. Bank officials said they saw “a little bit of stabilization” in home values, especially for lower price properties and in states like California. And while delinquencies remain high, fewer borrowers were falling behind on the mortgage.

Michael J. Cavanagh, the bank’s chief financial officer, called that a “hopeful sign” but stopped short of declaring that heavy losses were over. “We have to watch the economy and see where it heads,” he said in a conference call with journalists.

JPMorgan was the first of the nation’s biggest banks to report its third-quarter earnings. Bank of America, Citigroup and Goldman Sachs also release results this week. As one of the first major banks to warn of troubles with subprime mortgages, home equity loans and credit cards, JPMorgan is seen as a bellwether for the financial industry.

Although the housing market and economy remain weak, analysts expect to see a slowdown in consumer loan losses at the biggest banks and for them to start setting aside less money in their reserves. Meanwhile, the troubles are quickly moving to bad commercial real estate loans, which will place a heavier burden on smaller lenders.

Mr. Dimon still must contend with several looming issues at JPMorgan. His decision last month to replace the two co-heads of the investment banking division with a single leader, James E. Staley, raised concern within the ranks. JPMorgan’s credit card division is unlikely to turn a profit until 2011, and, like the most of the industry, its consumer franchise has seen a fall-off in new mortgage lending.

Mr. Dimon also faces obstacles in Washington. He must balance paying bonuses to JPMorgan investment bankers on blow-out earnings with public furor over Wall Street pay. New regulations on credit cards threaten to lower the profitability of that business, and lenders face other legislative efforts to curb bank fees and derivatives trading.

And JPMorgan, despite repaying its $25 billion taxpayer investment in early June, is still awaiting the sale of the government’s warrants in the bank. That could be a windfall for taxpayers. Their value, now at nearly $2 billion, has increased by almost $800 million since rivals like Goldman Sachs cut deals to buy them back this summer, according to Linus Wilson, a finance professor at the University of Louisiana at Lafayette.

Even so, JPMorgan is emerging from the current crisis with renewed confidence. Its investment bank, which posted a $1.9 billion profit, reported strong trading revenue, though short of the record levels earlier this year when the markets were in constant flux and prices skyrocketed. Meanwhile, the bank has continued to pick up business from corporations that are issuing bonds and selling stock to raise capital.

The bank’s consumer businesses, however, are still bleeding from bad loans. Its mortgage and consumer banking operations posted a narrow $7 million profit, while its credit card division lost $700 million in the third quarter. By next year, charge-offs could reach 11 percent of loan balances.

The corporate bank, meanwhile, booked a $341 million profit even as executives set aside more money for losses on souring commercial real estate loans.

“You are seeing the underlying earnings power is there, albeit challenged by the need in this quarter to add to reserves,” Mr. Cavanagh said of the bank’s results. “Stabilization is just the first phase; we need losses to return to more normalized levels.”



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Sources: NY Times, Google Maps