Jan. 16 (Bloomberg) -- JPMorgan Chase & Co., the third- biggest U.S. bank by assets, said profit dropped 34 percent on subprime-mortgage writedowns and higher costs for future loan defaults.

Fourth-quarter net income declined to $2.97 billion, or 86 cents a share, from $4.53 billion, or $1.26, a year earlier, the New York-based bank said today in a statement. JPMorgan rose 5.8 percent in New York trading as the $1.3 billion writedown was smaller than analysts estimated and the company reported higher earnings from consumer banking, credit cards and asset management.

``Their diversified business model really continues to separate JPMorgan from a lot of their peers,'' said William Fitzpatrick, an analyst at Racine, Wisconsin-based Optique Capital Management, which oversees $1.7 billion and owns JPMorgan shares.

While the profit decline was the first since Jamie Dimon became chief executive officer in 2005, JPMorgan's subprime- related losses were a fraction of the $18.1 billion reported yesterday by Citigroup Inc., Dimon's former employer. JPMorgan said it has prepared for what may be a ``substantial weakening'' in the U.S. economy by adding $2.3 billion to credit reserves, increasing the total to $10 billion.

JPMorgan rose $2.26 to $41.43 in composite trading on the New York Stock Exchange at 4 p.m. The gain pushed JPMorgan's market value to $139.5 billion, above Citigroup's $131.1 billion.

Good at Hedging

``They're very good at hedging positions,'' said Frederic Dickson, chief market strategist at D.A. Davidson & Co., which manages $23 billion in Lake Oswego, Oregon. ``They've kept their exposure a lot lighter than the other major global banks.''

Wells Fargo & Co., the biggest bank on the U.S. West Coast, said fourth-quarter profit dropped 38 percent as borrowers fell behind on loans. The stock gained 88 cents, or 3.3 percent.

JPMorgan's revenue climbed 7 percent to $17.4 billion, compared with the average estimate of $17.2 billion in a Bloomberg survey of analysts. Full year profit rose 6 percent to $15.4 billion on record net revenue of $71.4 billion.

Profit in the fourth quarter fell short of the 92-cent average estimate of 17 analysts surveyed by Bloomberg. Last year's fourth-quarter earnings included a one-time gain of $622 million.

Investment Bank

Net income at the investment-banking division tumbled 88 percent to $124 million in the fourth quarter, as credit-market turmoil reduced revenue from debt underwriting 39 percent, to $467 million. Fixed-income revenue tumbled 70 percent because of the writedown, to $615 million, and ``weaker trading results'' contributed to a 40 percent drop in equity market revenue, which fell to $578 million.

The retail bank's profit climbed 5 percent to $752 million, driven by increases in mortgage banking. Those gains were tempered by declines in the home-equity and auto-loan businesses. Charge-offs on home-equity loans totaled $248 million. Profit from auto loans was $49 million, a 25 percent drop from a year earlier.

Dimon said on a conference call with analysts that he isn't predicting a U.S. recession, though credit costs will increase as the economy weakens. The bank predicted credit-card charge-offs would be about 4.5 percent for the first half of the year, Chief Financial Officer Michael Cavanagh said on a call with analysts.

JPMorgan earned 15 percent less from its card services business, as its provision for future losses rose 40 percent to $1.79 billion.

Credit Quality

``With the economic environment weakening, credit quality trends, particularly in the consumer segments, will work against them in the coming quarters,'' wrote Goldman Sachs Group Inc. analyst William Tanona in a research note today. He rates the stock ``neutral.''

Return on equity from continuing operations, a gauge of how effectively the company reinvests earnings, was 10 percent, compared with 14 percent a year earlier.

JPMorgan lost 18 percent of its market value in the past 12 months, compared with 50 percent at New York-based Citigroup and 29 percent at Charlotte, North Carolina-based Bank of America Corp.

JPMorgan's Tier 1 capital ratio, which regulators monitor to assess banks' ability to withstand loan losses, remained unchanged from the third quarter at 8.4 percent.

Credit Suisse Group analyst Susan Roth Katzke reduced her earnings per share estimate for JPMorgan this year to $4.20 from $4.45 on increased credit costs.

Credit Cards

Deutsche Bank AG analyst Michael Mayo reduced his rating on JPMorgan to ``hold'' from ``buy'' yesterday ``due to accelerating problems in U.S. consumer banking.'' Losses from credit cards and mortgages are increasing as the global economy slows. Citigroup said yesterday its record $9.83 billion loss was due in part to an increase in provisions for losses on auto and credit-card loans.

``We feel that JPMorgan cannot escape tougher external conditions,'' Mayo wrote in his research note.

Richard Bove, an analyst at Punk Ziegel & Co. in Lutz, Florida, said JPMorgan may capitalize on its relative success in protecting its capital by purchasing another bank. Bove pointed to Seattle-based Washington Mutual Inc., the biggest savings and loan, as one possibility.

Dimon said on the conference call that he's ``open-minded'' about the possibility of acquiring other banks, and the current market environment makes such a takeover more likely.

Leveraged Buyouts

JPMorgan arranged $170 billion of loans used to finance leveraged buyouts in the U.S. last year, more than any bank and representing 16 percent of the market, according to data compiled by Bloomberg. The company was also the largest underwriter of U.S. high-yield corporate debt, with $20 billion in 2007.

The fourth quarter may be the worst earnings period for the financial industry since the Great Depression. Analysts estimate Merrill Lynch & Co., the biggest U.S. brokerage, will report a record loss tomorrow of more than $3 billion after writing down the value of mortgage-related securities. Bank of America, the second-largest U.S. bank by assets after Citigroup, may report its biggest profit decline since its formation in 1998 from the merger of BankAmerica and NationsBank.

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

Last Updated: January 16, 2008 16:35 EST