JPMorgan Shares Fall on Fixed-Income, Consumer Loans (Update1)

Jan. 15 (Bloomberg) -- JPMorgan Chase & Co., the second- largest U.S. bank, fell in New York trading after fixed-income trading revenue in the fourth quarter declined from the previous three months and the firm said it was “cautious” about the outlook for consumer loan defaults.

The shares dropped $1.01, or 2.3 percent, to $43.68 at 4 p.m. in New York Stock Exchange composite trading. They gained 84 percent in the past year through yesterday.

Lower volume and “tighter spreads” between bid and offer prices made the fixed-income business less profitable, the New York-based bank said today in a statement. Fixed-income markets revenue dropped to $2.7 billion from a record $5 billion in the third quarter.

“Fixed-income trading weakness was worse than expected,” David Trone, an analyst at Macquarie Group, wrote in a note to investors today. The earnings were “low-quality,” Trone said.

The results were a dark spot on the company’s earnings for the period, which more than quadrupled compared with the fourth- quarter of 2008. Chief Executive Officer Jamie Dimon called the performance “a little disappointing,” and said the bank was seeing a slight pick-up in client demand this month from December.

The retail unit posted its first quarterly loss since the first quarter of 2008, and the company boosted reserves for consumer loans by $1.9 billion, bringing the total to $32.5 billion.

‘Modestly Disappointing’

“The results will likely be viewed as modestly disappointing on revenues and the cautious tone around the credit outlook,” John McDonald, a senior analyst at Sanford C. Bernstein, wrote in a note to investors today.

Fourth-quarter net income climbed to $3.28 billion, or 74 cents a share, from $702 million, or 6 cents, in the same period a year earlier. Twenty-two analysts surveyed by Bloomberg estimated per-share earnings of 60 cents.

Net revenue on a managed basis rose 32 percent to $25.2 billion from $19.1 billion. The bank said revenue climbed on higher principal transactions and investment-banking fees.

JPMorgan set aside $549 million for investment bank compensation, down 80 percent from the third quarter. That brings full-year compensation costs at the investment bank, which more than doubled its revenue from 2008, to $9.33 billion. The figure was 21 percent below Macquarie Group analyst David Trone’s estimate of $11.8 billion, and less than the $11 billion Ladenburg Thalmann analyst Brad Ball expected.

Compensation Cost

Results “included a sharp fall in fixed-income trading revenue, but offset by a low investment bank compensation cost,” Richard Staite, an analyst at Atlantic Equities, wrote in a note to investors. “We see the results as more positive for commercial and retail banks while raising concerns about the revenue outlook for investment banks.”

Dimon, 53, has earned a profit in every quarter of the financial crisis, offsetting loan losses at consumer banking and credit cards with fee income.

“While we are seeing some stability in delinquencies, consumer credit costs remain high and weak employment and home prices persist,” Dimon said in the statement. “Accordingly, we remain cautious.”

JPMorgan is the first of the largest U.S. banks to report earnings. Goldman Sachs Group Inc. may say Jan. 21 that profit climbed to $3.36 billion after a loss of $2.29 billion in the previous year’s quarter, according to analysts’ estimates compiled by Bloomberg.

Bank of America

Citigroup Inc. may say Jan. 19 it lost $5.03 billion from repaying government bailout money, while Bank of America Corp., the biggest U.S. bank by assets, may say on Jan. 20 it earned $164 million. Wells Fargo & Co. is expected to earn $1.62 billion, its smallest profit in four quarters.

JPMorgan’s investment bank rebounded from a loss in 2008’s fourth quarter to post net income of $1.9 billion. Results benefited from $181 million released from credit reserves during the period.

The company was the No. 1 underwriter of stocks and bonds in the U.S. last year, and Dimon’s success in weathering the global credit contraction may help him restore the dividend to pre-crisis levels before his competitors.

He said on a conference call with analysts that U.S. banks will probably have “too much” capital later this year because of new demands from regulators. Some companies will use the money to restore dividends, Dimon said.

JPMorgan’s consumer bank posted a loss of $399 million as the firm set aside more money to cover credit losses. The unit’s retail-banking business had a $1 billion profit, more than offset by a $1.4 billion loss from consumer loans.

Credit Cards

Credit cards, a division Dimon has said is “doing really poorly,” narrowed its loss to $306 million from $371 million in the fourth quarter of 2008. The net charge-off rate fell to 9.33 percent from 10.3 percent in the third quarter and rose from 5.56 percent in the year-earlier period.

Chief Financial Officer Michael Cavanagh said on a conference call with reporters that the bank “can’t say” it’s reached a peak yet in reserves.

Dimon reiterated today that the credit-card unit will probably lose about $1 billion a quarter in the first half of 2010 before the company sets aside money to cover more losses. Credit-card defaults typically rise and fall with the U.S. jobless rate, which was 10 percent at the end of December.

Losses were artificially low due to a payment holiday the bank implemented. Net income for the division could be reduced by as much as $750 million from legislative changes, the bank said previously.

Tier 1

The Tier 1 capital ratio climbed to 11.1 percent from 10.2 percent in the third quarter.

Income in the commercial-banking unit dropped to $224 million in quarter from $480 million as the bank boosted reserves for credit losses to $494 million from $190 million, reflecting “continued weakness in the credit environment, particularly real-estate-related segments,” the bank said.

Cavanagh said demand for loans from mid-sized companies remains “light.”

Losses for the second half of the year will depend on the economy and decisions about adding to loan-loss reserves, Dimon has said.

The asset-management unit posted net income of $424 million, up from $255 million a year earlier. Treasury and Securities Services profit fell to $237 million from $533 million.

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

To contact the editor responsible for this story: Alec McCabe at amccabe@bloomberg.net.