Oct. 17 (Bloomberg) -- JPMorgan Chase & Co., the third- biggest U.S. bank, reported quarterly profit that exceeded analysts' estimates on private-equity gains, higher asset management fees and lower compensation expenses.

Net income rose 2.3 percent to $3.4 billion, or 97 cents a share, even after investment banking profit sank 70 percent and the firm wrote down the value of loans for leveraged buyouts by $1.3 billion, the New York-based bank said today in a statement. The average estimate of analysts surveyed by Bloomberg was 90 cents. The stock climbed in New York trading.

JPMorgan has reported faster earnings growth than Citigroup Inc., the biggest U.S. bank, every quarter since Jamie Dimon became chief executive officer in December 2005. Former Citigroup Chairman Sanford Weill fired Dimon, the company's president, in 1998, ending a 16-year relationship.

``JPMorgan is clearly executing better than Citi,'' said Mark Batty, an analyst at PNC Wealth Management, which oversees $77 billion and held 4.3 million shares of JPMorgan as of Sept. 28. ``Despite turmoil in the markets, they were able to grow revenue faster than expenses.''

JPMorgan's third-quarter revenue climbed 3.6 percent to $16.1 billion, just short of the average analyst estimate of $16.2 billion. Return on equity, a gauge of how effectively the company reinvests profits, was 11 percent, unchanged from a year earlier, when the company earned $3.3 billion.

Compensation Cuts

Citigroup's return on equity dropped to 7.4 percent from 18.9 percent a year earlier, making it the second-lowest among Wall Street firms that have reported earnings, after Bear Stearns Cos.' 5.3 percent. Goldman Sachs Group Inc.'s 31.6 percent was the highest.

Dimon, 51, cut expenses almost 5 percent to $9.33 billion, from $9.8 billion. The firm cited lower compensation costs.

The investment banking division's profit plummeted 70 percent to $296 million in the third quarter, after the firm reduced the value of leveraged loans and collateralized debt obligations on its books by $1.64 billion. Analysts at Sanford C. Bernstein & Co. said in an Oct. 5 note to investors that the bank would report writedowns of about $2 billion.

Profit from asset management rose 51 percent to $521 million, and the firm booked $766 million of private-equity gains, more than triple the $226 million in the same quarter last year.

``The environment was and may remain challenging, but diversification is working for JPMorgan,'' Credit Suisse Group analyst Susan Roth Katzke wrote in a research note today.

Bad Debts

In the retail bank, net income fell 14 percent to $639 million as the firm set aside more money to cover bad loans amid the worst housing market in 16 years and surging defaults on subprime mortgages.

The set-aside was $680 million, including an increase of $306 million for home-equity loans. The bank charged off $150 million of the loans compared with $29 million in the prior year.

Citigroup said earlier this week that it booked about $6.5 billion of costs for fixed-income trading, underwriting losses and bad consumer debts. Like Wall Street rivals Goldman Sachs, Morgan Stanley and Merrill Lynch & Co., Citigroup had to write down the value of mortgages, asset-backed securities and corporate loans.

JPMorgan's earnings increase in the quarter compared with the 57 percent slump at Citigroup. While Dimon is eliminating fixed-income jobs and is ``cautious about the future economic environment,'' he also plans to expand in areas including investment banking and retail mortgages, he said in the statement.

Mortgage Love

``Our mortgage share in both home equity and prime mortgage and subprime is going to go up pretty substantially,'' Dimon said on a conference call with investors. ``We love the business.''

The bank's shares have risen at an annual rate of 12 percent since Dimon was promoted. Charles Prince, who succeeded Weill as Citigroup CEO in 2003, has returned 3.3 percent a year.

JPMorgan gained $1.26, or 2.8 percent, to $46.37 at 4 p.m. in composite trading on the New York Stock Exchange. The stock has dropped 4 percent this year, compared with the 20 percent decline at Citigroup. Charlotte, North Carolina-based Bank of America Corp., the second-biggest U.S. bank, has fallen 6.3 percent.

Dimon is eliminating as much as 10 percent of the jobs in two groups that financed leveraged buyouts and packaged debt into securities. UBS AG and Credit Suisse, Switzerland's two largest banks, said this month they would cut a total of 1,820 jobs.

`Trimming'

``Certainly some business don't have the same future growth potential as they had before,'' Dimon said in a call with reporters today, mentioning structured finance. ``There will be some trimming.''

The bank has arranged $138 billion of loans to finance leveraged buyouts in the U.S., more than any other lender and almost 17 percent of the market, according to data compiled by Bloomberg. The company is also the largest underwriter of U.S. high-yield corporate debt, with $17.5 billion so far this year.

JPMorgan and five other banks are marketing at least $11 billion of loans and bonds this week to fund the buyout of Texas power company TXU Corp. by private-equity firms Kohlberg Kravis Roberts & Co. and TPG Inc. The offering is the largest since credit markets froze in July, when the collapse of the subprime mortgage market led investors to shun bonds linked to home loans as well as other high-risk debt.

$80 Billion Fund

Bank of America, which reports earnings tomorrow, may reduce the value of loans for leveraged buyouts by $700 million, according to analysts at Sanford C. Bernstein & Co. Wachovia Corp., the fourth-largest lender, probably will say it wrote down holdings by $670 million after taxes, analysts at Citigroup said.

JPMorgan joined Citigroup and Bank of America this week to set up an $80 billion fund to help revive the asset-backed commercial paper market. The new company will buy assets from structured investment vehicles, units set up to purchase securities such as bank bonds and subprime mortgage debt.

To contact the reporter on this story: Elizabeth Hester in New York at ehester@bloomberg.net.

Last Updated: October 17, 2007 16:29 EDT