April 16 (Bloomberg) -- JPMorgan Chase & Co., the second- largest U.S. bank by assets, reported profit that beat analysts’ estimates as fixed-income trading revenue rose to a record. Bad loan provisions climbed as more consumers defaulted on debt.

First-quarter earnings fell 10 percent to $2.14 billion, or 40 cents a share, compared with $2.37 billion, or 68 cents, a year earlier, the New York-based bank said today in a statement. Per-share profit was expected to be 32 cents, according to the average estimate of 18 analysts surveyed by Bloomberg.

JPMorgan’s market value has almost doubled in the past month on speculation the bank’s profit slide would slow. Chief Executive Officer Jamie Dimon, 53, helped spark the rally when he said the company was profitable in January and February. Still, the bank boosted reserves for credit losses in the quarter, and Dimon said today the company may have to increase them further.

“It’s nice to see them beat the number, but by the same token I think you are going to want to proceed with caution,” William Fitzpatrick, an equity analyst at Optique Capital Management in Racine, Wisconsin, said in a Bloomberg Television interview. “We all know there are more losses in the pipeline.” Optique holds about 400,000 JPMorgan shares.

JPMorgan rose 68 cents, or 2.1 percent, to $33.24 in New York Stock Exchange composite trading at 4:11 p.m., bringing the gain for this year to 5.4 percent. The bank plans to sell dollar-denominated debt without the backing of the U.S. government for the first time since August, according to a person familiar with the transaction.

‘Continued Deterioration’

Dimon said on a conference call with reporters that he expects “some continued deterioration” in the economy, which is weathering the biggest employment slump in the post-World War II era. The unemployment rate reached a 25-year high last month.

Housing-related losses at JPMorgan may be as high as $1.4 billion in the next few quarters for home-equity loans, $500 million for prime mortgages and $475 million for subprime loans, the bank said.

The bank plans to continue using the government’s loan modification program and is unsure what the effect on earnings will be from that.

Revenue in the investment-banking unit was a record $8.3 billion, including $4.9 billion from fixed-income trading. The business generated $3 billion in the same period a year earlier. Investment-banking profit was $1.61 billion, compared with a loss of $87 million in the first quarter of 2008.

JPMorgan reported $711 million in writedowns on leveraged loans and $214 million on mortgage-related securities.

Retail Bank

Retail banking posted a profit of $474 million, compared with a loss of $311 million in last year’s first quarter.

The bank set aside $4.2 billion to cover bad loans, bringing the total reserve to $28 billion. Credit cards, a unit Dimon said in February he didn’t expect to be profitable this year, lost $547 million in the quarter. The default rate climbed to 7.72 percent from 5.56 percent in the fourth quarter and 4.37 percent in the previous year’s quarter.

“It is almost certain we will see no improvement in those numbers for the next three quarters, probably through the middle of next year,” Gavin Graham, director of investments at Bank of Montreal Asset Management in Toronto, said in a Bloomberg TV interview.

Rising unemployment has boosted default and delinquency rates on credit-card and other consumer loans. JPMorgan cut its dividend 87 percent in February, a step Dimon said would help protect the company if the economy deteriorated significantly.

Head Count

JPMorgan said the firm had 219,569 employees as of March 31, including 38,211 from Washington Mutual Inc. Bear Stearns Cos. employees are counted among the remaining 181,358, a decrease of 808 from March last year.

JPMorgan’s acquisition of Bear Stearns last year eliminated a competitor for investment-banking fees and helped boost the firm’s commodities trading and prime brokerage businesses. The September acquisition of Washington Mutual is adding to earnings by expanding the reach of the retail and commercial banks in regions including the U.S. West Coast.

The integration of Washington Mutual is “on track,” the company said. The acquisition boosted deposits 62 percent and more than doubled checking accounts.

Dimon took $25 billion in U.S. rescue funds through the Troubled Asset Relief Program. In a conference call with analysts today, Dimon called the money “a scarlet letter” and “the TARP baby,” saying he is eager to repay the government. That would free the company from compensation restrictions and other oversight that was tied to the bailout money.

‘Learned Our Lesson’

Dimon said the bank doesn’t expect to participate in the Public-Private Investment Program, known as PPIP, the U.S. Treasury program to buy illiquid assets from banks. “We learned our lesson” about borrowing from the government, he said.

Goldman Sachs Group Inc. raised $5 billion this week by selling shares to repay its $10 billion in federal rescue funds, then saw its stock slump on speculation first-quarter earnings at the New York-based company weren’t sustainable. Goldman Sachs, the sixth-largest U.S. bank, reported earnings April 13 that were twice as high as analysts estimated.

Citigroup Inc., which is scheduled to announce its results tomorrow, may post a loss of 32 cents a share, according to the average estimate of 13 analysts surveyed by Bloomberg. Bank of America Corp., San Francisco-based Wells Fargo & Co. and New York’s Morgan Stanley report results next week. Wells Fargo said last week it expected to report a record $3 billion in profit.

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

Last Updated: April 16, 2009 16:14 EDT