JPMorgan’s Legal Costs Lowered Bank Industry Profits

JPMorgan Chase & Co.’s legal bills contributed to a decline in the Federal Deposit Insurance Corp. tally of U.S. bank-industry profits for the third quarter.

Lenders reported net income of $36 billion for the three-month period that ended Sept. 30 -- 3.9 percent less than the year-earlier period and a 5.5 percent drop from the previous quarter, the FDIC said in its Quarterly Banking Profile. The industry’s first year-over-year decline in more than four years came mainly from a spike in litigation costs, FDIC Chairman Martin Gruenberg said in a briefing.

“Had it not been for that, the upward trend in earnings would have continued,” Gruenberg said.

JPMorgan, the biggest U.S. bank by assets, took a $7.2 billion charge in the third quarter to cover the cost of mounting litigation and regulatory probes. The New York-based bank agreed this month to a record $13 billion settlement to end government investigations of its mortgage-bond sales.

The industry’s home-loan balances declined by 0.7 percent as higher interest rates brought down demand for mortgage refinancing, the FDIC said in the report. Major lenders’ mortgage originations were down 30.1 percent from the previous quarters.

Banks have been struck especially hard by the borrowers’ decreased appetite for refinancing home mortgages, according to James Chessen, chief economist at the American Bankers Association.

Loan Demand

“That had been a very steady, solid part of the revenue to make up for the fact that there was low loan demand,” Chessen said of refinancing activity in an interview. “We’re not going to see the mortgage rates come down significantly.”

Chessen said the quarter still showed “solid earnings,” and the industry is on pace for one of its best years in a decade or more.

Consumer-credit gains countered some of the soft residential mortgage data, with car loans up 3.2 percent and credit-card balances rising by 1 percent, according to the report.

Losses from existing loans have dropped sharply, with the third quarter’s $11.7 billion in charge-offs down 47.4 percent from a year earlier, with an even greater 72.5 percent decline for residential loans, according to the report. With past-due loans also declining, lenders set aside the smallest quarterly total in loan-loss reserves in 14 years: $5.8 billion.

Earnings Revision

Today’s report also revised the previous quarter’s earnings from $42.2 billion to $38.1 billion, negating what had been noted as record profit. The FDIC said the revision was based on goodwill impairments.

The number of banks continued to slip in the third quarter from 6,940 in the previous quarter to 6,891 as 43 firms were absorbed in mergers and six failed. Gruenberg said he assumes applications for new charters will rise as the economic recovery takes hold. Among the banks, the list of “problem” institutions has also continued to fall -- from 553 to 515, continuing a 10-quarter trend.

The agency’s deposit insurance fund, which protects customer accounts of as much as $250,000 against bank failures, rose $2.9 billion to $40.8 billion, the FDIC said. Bank assessments were increased in 2011 to replenish the fund, which fell into deficit as the agency resolved hundreds of bank failures stemming from the subprime mortgage crisis.

Investors have pushed the 24-company KBW Bank Index up more than 32 percent this year.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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