Jan. 15 (Bloomberg) -- JPMorgan Chase & Co., the second- largest U.S. bank by assets, said profit fell 76 percent as rising defaults and the U.S. recession forced the bank to write down $2.9 billion of assets and boost reserves for bad loans.

Fourth-quarter net income was $702 million, or 7 cents a share, compared with $2.97 billion, or 86 cents, a year earlier, the New York-based bank said today in a statement. That included a $1.3 billion gain from closing a joint venture and “risk- management results,” the company said. Without the gains, JPMorgan lost 28 cents a share.

JPMorgan almost tripled its provisions for bad debt in 2008 as the year-old U.S. recession pushed the unemployment rate to a 15-year high and foreclosures rose to a record. The bank said its investment-banking business lost “several billion dollars” on assets inherited from the Bear Stearns Cos. acquisition, though it gained market share in the quarter.

“We’ve got what looks like maybe one of the worst recessions in a long time,” Chief Executive Officer Jamie Dimon, 52, said on a conference call with reporters. “You have to expect loan losses, consumer and wholesale, to go up in a recession, so everyone is struggling with this extreme environment.”

Share Performance

JPMorgan fell $1.57 to $24.34 in New York Stock Exchange composite trading at 4:12 p.m. Some analysts expressed relief that the company was able to avoid the kinds of losses rivals including Citigroup Inc. will probably report later this month. Dimon also said bank officials “feel an obligation to pay the dividend.”

“People are just looking for the fact that the bottom isn’t falling out,” Robert Hegarty, managing director at TowerGroup, said in a Bloomberg Radio interview. “JPMorgan certainly came through this morning with that kind of news.”

Fourth-quarter writedowns for mortgage-related assets and leveraged loans totaled $2.9 billion before taxes, the company said. The bank added $4.1 billion to loan-loss reserves, bringing the total provision to $24 billion. Tier 1 capital ratio was estimated at 10.8 percent as of Dec. 31.

Moody’s Investors Service lowered its credit rating on JPMorgan to Aa3 from Aa2 after results were released, citing the “poor prospect” of generating capital in the recession and protracted market illiquidity.

Investment Bank

JPMorgan’s investment-banking division lost $2.36 billion in the fourth quarter, compared with profit of $124 million the previous year, and revenue was negative $302 million. Leveraged loan writedowns totaled $1.8 billion, and mortgage-related writedowns were $1.1 billion. Loans made before the credit crisis began were written down to 55 cents on the dollar, Chief Financial Officer Michael Cavanagh said on a conference call with analysts today.

Earnings at the consumer-banking subsidiary declined 15 percent to $624 million from $731 million as the firm set aside more money for bad loans.

The bank’s credit-card unit had a loss of $371 million compared with a profit of $609 million a year earlier. Credit- card losses excluding Washington Mutual Inc.’s portfolio could reach 7 percent in the first quarter of 2009 and climb to 8 percent by the end of the year, JPMorgan said. The so-called charge-off rate rose to 5.56 percent from 5 percent in the third quarter and 3.89 percent a year ago.

Card Losses

Dimon said on the conference call that credit-card losses will be driven by the rising unemployment rate, which he said could climb to 8 percent this year, from 7.2 percent in December. First-time claims for unemployment benefits rose 54,000 last week, more than forecast, the Labor Department said today.

JPMorgan may cut more employees in the investment bank, possibly to levels before the Bear Stearns Cos. acquisition, Dimon said.

Losses in the prime mortgage portfolio could climb as high as $400 million in the next several quarters, and subprime losses may be as high as $425 million per quarter in 2009, the bank said. Home-equity losses may reach $1 billion, Cavanagh said on the call.

Still, Cavanagh said “we feel good” about underlying trends in the retail banking business.

Average deposits excluding WaMu, which the bank bought in September, rose 2 percent. The company made 30 percent fewer mortgages during the quarter, compared with the same period in 2007. More than 90 percent of the loans the bank did make qualified for purchase by government-sponsored enterprises.

Bank of America

JPMorgan, which moved up its earnings announcement by six days, is the first of the largest U.S. banks to disclose fourth- quarter figures. New York-based Citigroup reports tomorrow, and Bank of America Corp., which bought Merrill Lynch & Co. two weeks ago, is scheduled to release results on Jan. 20. The bank may get more aid from the government to help absorb losses to Merrill’s holdings, three people familiar with the matter said.

Fourteen analysts surveyed by Bloomberg had an average earnings estimate of 1 cent a share for the fourth-quarter. The bank earned $5.6 billion, or $1.37 a share, for the full year on revenue of $73.4 billion, excluding merger-related items.

Dimon said the firm is “busy” integrating its recent acquisitions, and doesn’t expect additional purchases unless they offered “unquestionable” value.

FDIC Debt

JPMorgan has issued $17.9 billion of debt backed by the Federal Deposit Insurance Corp. under the Temporary Liquidity Guarantee Program, which insures bank debt issued through June. Financial firms are using the new channel to fund themselves after the credit seizure sapped demand for their debt.

Federal Reserve officials and President-elect Barack Obama have said more government help will be needed to shore up the U.S. financial system.

Fed Chairman Ben S. Bernanke said Jan. 13 that banks’ holdings of hard-to-sell investments raise questions about the companies’ underlying value, and called for the government to take on or insure the assets. Obama is deciding how to use the remaining $350 billion of the $700 billion Troubled Asset Relief Program that Congress approved in October, with some Democrats saying the plan should favor homeowners and community banks over larger financial-services companies.

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

Last Updated: January 15, 2009 16:20 EST