Oct. 14 (Bloomberg) -- JPMorgan Chase & Co. posted its highest profit since the subprime mortgage market collapsed in 2007, relying on a surge in investment-banking revenue to weather higher losses on consumer loans.

Third-quarter earnings rose to $3.59 billion, or 82 cents a share, from $527 million, or 9 cents, in the same period a year earlier at the height of the financial crisis, the New York- based company said today in a statement. Profit surpassed the highest estimate, 65 cents, among 20 analysts surveyed by Bloomberg.

Fixed-income revenue jumped to a record $5 billion from a year earlier, when JPMorgan had markdowns of $3.6 billion. The bank, the nation’s second-biggest, repaid $25 billion of U.S. rescue funds in June even as credit-card and mortgage losses continued to mount. Credit costs will stay high “for the foreseeable future,” Chief Executive Officer Jamie Dimon said in today’s statement.

Capital-market profits helped JPMorgan build a “fortress balance sheet that allows them to separate themselves from the rest of the financial world in terms of the Darwinian process,” said Michael Holland, chairman of Holland & Co. in New York, which owns JPMorgan shares among the more than $4 billion it oversees. “It’s pretty impressive stuff.”

JPMorgan rose $1.50, or 3.3 percent, to $47.16 in composite trading on the New York Stock Exchange at 4 p.m. The shares have gained 50 percent this year, the second-best performer among the biggest U.S. banks, behind Goldman Sachs Group Inc.

Investment Banking

The investment-banking unit generated $1.92 billion in profit during the quarter, or more than half the bank’s total. The company, which bought Bear Stearns Cos. after the firm collapsed last year, is the world’s biggest underwriter of stock and equity-linked securities as well as U.S. debt, according to data compiled by Bloomberg.

The investment bank set aside $8.79 billion for compensation this year, or 38 percent of revenue. That’s up from $6.54 billion in the same period of last year, when the unit allocated 52 percent of revenue to pay employees.

Goldman Sachs, which is scheduled to report third-quarter earnings tomorrow, allocated 49 percent of first-half revenue, or $11.4 billion, to pay employees. Morgan Stanley set aside 71 percent of first-half revenue, or $5.91 billion. Both companies are based in New York.

Corporate Unit

Profit in the corporate and private-equity business was $1.29 billion, compared with a loss of $1.78 billion last year, because of trading gains on investments, Chief Financial Officer Michael Cavanagh said on a conference call with analysts. Profit for the unit will probably be closer to $500 million in the next quarter or two, Cavanagh said.

The bank added $2 billion to its consumer credit reserves, bringing the companywide total to $31.5 billion, or 5.3 percent of loans. Credit Suisse Group AG analyst Moshe Orenbuch estimated the bank would add $1.4 billion to the reserve.

“Credit costs remain high and are expected to stay elevated for the foreseeable future,” Dimon said in the statement. “While we are seeing some initial signs of consumer credit stability, we are not yet certain that this trend will continue.”

The bank may add less to loan-loss reserves in coming quarters depending on the health of the economy, Cavanagh said on a conference call with reporters.

Credit Cards

The bank’s credit-card and consumer businesses have stalled as the U.S. economy emerges from the worst recession since the 1930s. The unemployment rate rose to 9.8 percent in September, the highest level since 1983, and economists predict a rebound in consumer spending will wane as joblessness surpasses 10 percent.

The retail bank posted net income of $7 million, a decline of $57 million from a year earlier, as the bank set aside more money to cover credit losses. Home-equity charge-offs climbed to $1.14 billion from $663 million and are expected to reach about $1.4 billion “over the next several quarters,” the bank said in slides posted on its Web site. Prime-mortgage losses rose to $525 million from $177 million.

Credit cards, a division Dimon has said is unlikely to make money this year or next, lost $700 million, compared with income of $292 million in the third-quarter of last year. The net charge-off rate, excluding some bad loans acquired in the takeover of Washington Mutual, climbed to 9.41 percent, from 8.97 percent in the second quarter and 5 percent in the year- earlier period.

Card Forecast

Dimon said on the conference call with analysts that credit cards may lose $1 billion in the first quarter.

“The capital markets portion of the industry was very strong in the quarter, while there are continued problems in the traditional banking part of the company,” Richard Bove, an analyst at Rochdale Securities Inc. in Lutz, Florida, said in a Bloomberg Radio interview. “What you have is this tremendous pent-up demand for funding, which burst open in the quarter.”

The Tier 1 capital ratio, a gauge regulators use to measure financial strength, climbed to 10.2 percent from 9.7 percent in the second quarter.

JPMorgan’s value-at-risk, an estimate of how much the bank stands to lose in a single day of trading, dropped to an average of $206 million in the third quarter from $267 million in the prior three months. The bank cut its value-at-risk in equities trading to $28 million in the quarter from $77 million in the previous period and $80 million in last year’s third quarter.

Dimon said on the call with reporters that value-at-risk declined as the bank sold some of its more volatile assets.

Commercial Banking

Income in the commercial-banking unit climbed 9 percent to $341 million as WaMu added to revenue. JPMorgan said it set aside $355 million to cover credit losses, compared with $126 million in the previous year.

The asset-management unit boosted profit 23 percent to $430 million, while treasury and securities services posted net income of $302 million, 26 percent less than the previous year.

JPMorgan is the first of the largest U.S. banks to report earnings. Goldman Sachs may say tomorrow that profit almost tripled to $2.4 billion, according to analysts’ estimates. New York-based Citigroup Inc., which also reports tomorrow, is expected to post a $2.55 billion loss that would mark its sixth unprofitable quarter in the past eight.

Bank of America Corp., JPMorgan’s bigger competitor, may post a loss of $212.2 million on Oct. 16 as the Charlotte, North Carolina-based company continues to integrate its Merrill Lynch & Co. acquisition, according to the Bloomberg survey.

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

Last Updated: October 14, 2009 16:09 EDT