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JPMorgan Profit Rises 76% on Cut in Bad-Loan Reserve

JPMorgan Chase & Co. chairman, president and chief executive officer Jamie Dimon. Photographer: Tony Avelar/Bloomberg
JPMorgan Chase & Co. chairman, president and chief executive officer Jamie Dimon. Photographer: Tony Avelar/Bloomberg

July 15 (Bloomberg) -- JPMorgan Chase & Co., the second-biggest U.S. bank by assets, said profit rose 76 percent, buoyed by a $6.3 billion reduction in provisions for soured mortgages and credit-card loans from last year.

Second-quarter net income climbed to $4.8 billion, or $1.09 a share, even as revenue fell 7.6 percent, the New York-based company said today in a statement. The bank earned $2.72 billion, or 28 cents, in the same period a year earlier and $3.33 billion in the first quarter.

Chief Executive Officer Jamie Dimon, 54, said he isn’t satisfied with the results, even though they surpassed the most optimistic analyst’s estimate, because consumer lending charge-offs and late payments remain high. A 7.6 percent decline in revenue prompted Shannon Stemm, an analyst for Edward Jones & Co. in St. Louis, to question whether the profit report masked weakness in JPMorgan’s main businesses.

“The results beat estimates by so much because of the large reserve release,” Stemm said. “Revenue fell quarter over quarter and year over year, largely driven by weaker investment-banking and fixed-income trading results, which were down because of the volatile trading environment.”

JPMorgan rose 11 cents, or 0.3 percent, to $40.46 in composite trading on the New York Stock Exchange at 4 p.m. The stock lost 3.2 percent this year through yesterday.

Fixed Income

Revenue declined to $25.6 billion in the second quarter from $27.7 billion in the same period last year and from $28.2 billion in the first three months of 2010.

Net income in investment banking dropped 6.1 percent from a year earlier, to $1.39 billion, even after benefitting from the release of $325 million in reserves, compared with an $871 million expense the prior year. Fixed-income revenue was $3.6 billion, compared with $4.9 billion a year earlier and $5.46 billion in the first quarter.

JPMorgan also recorded a $600 million gain in investment banking as the value of its own outstanding debt decreased due to market volatility, according to Keith Horowitz, an analyst at Citigroup Inc.

The investment bank contributed $1.38 billion of JPMorgan’s net income, or 29 percent. That compares with 74 percent in the first quarter and 54 percent in the second quarter of 2009.

Bond and equity issuance fell in the second quarter as weak economic data and the European debt crisis damped investor demand. U.S. bond underwriting volume fell by $193.1 billion, or 36 percent, to $336.1 billion while global equity offerings plunged by $30.3 billion, or 21 percent, to $117.2 billion from the first quarter to the second quarter, data compiled by Bloomberg show.

Capital Markets

Matt O’Connor, an analyst with Deutsche Bank AG in New York, said it was encouraging that investment-banking earnings fell only slightly, “because last quarter was really, really strong for capital markets.” Trading volumes were down across the board while spreads on bonds, the difference between what a bank pays to issue debt and pays investors to buy it, have widened, he said.

Richard Staite at Atlantic Equities said the results were “OK,” and that he remains concerned about future revenue growth.

The bank boosted earnings, in part, by reducing its total provisions for credit losses in all divisions to $3.36 billion, compared with $7 billion in the previous quarter and $9.7 billion the year before. The company cut provisions for bad loans in the retail-banking business by $2 billion in the second quarter.

‘Normal’ Earnings

Dimon said the gain from reclaiming reserves doesn’t represent “normal ongoing earnings.” They were partially offset by a $550 million charge to cover the bonus tax on executive compensation in the United Kingdom.

The per-share earnings compared with an average estimate for adjusted earnings of 71 cents projected by 22 analysts surveyed by Bloomberg.

Retail banking earned $1.04 billion, compared with a $131 million net loss during the first quarter and a $15 million gain a year earlier. The division benefited from a reduction in provisions to $1.7 billion from $3.73 billion the prior year, JPMorgan said.

Credit-card services earned $343 million, compared with a net loss of $303 million in the prior three months and a $672 million loss a year earlier. JPMorgan reduced provisions against future losses by $2.4 billion.

Problem Assets

“People can debate whether that is artificially inflating the quality of earnings,” said Christopher Wolfe, a bank debt analyst at Fitch Ratings in New York. “If you think banks have identified their problem assets, then that’s valid. If you think banks have problem loans that they haven’t come clean about, then that would be a concern.”

He said the industry is generally well-reserved given the amount of non-performing loans on bank books.

Dimon said in the statement that it’s “too early to say” how much credit trends will improve.

JPMorgan is the first of the largest U.S. banks to report earnings. Bank of America Corp. and Citigroup, the first-and third-largest U.S. lenders, respectively, may report earnings of $2.6 billion and $1.46 billion when they release results tomorrow, the Bloomberg survey shows.

Analysts including Paul Miller, a former examiner for the Philadelphia Federal Reserve Bank who is now at FBR Capital Markets, said they want to see how much new bank regulations cost the bank. The Senate today approved the legislation and sent the bill to the White House for President Barack Obama’s signature.

Derivatives Plans

Dimon has previously estimated that the changes to derivatives regulation alone may cost JPMorgan “$700 million to a couple of billion dollars.” He told analysts on a call today that it’s too early to quantify the legislation’s impact and that “over time, it will all be repriced into the business.”

Investors welcomed the company’s renewed stock repurchase program. Former Chief Financial Officer Mike Cavanagh said JPMorgan bought back $500 million in shares through yesterday after receiving approval from regulators to return some capital to shareholders.

The company bought back $135 million through the end of the second quarter and the rest of the shares this month, said Cavanagh, who is now the company’s chief executive officer for Treasury and Security Services.

“You can assume that we don’t do that without consulting with our regulators,” Cavanagh told reporters on a conference call today. “It’s a small amount of buyback activity and I wouldn’t draw too many conclusions from that other than yes, in fact, it’s been a while and we’re back with some degree of activity.”

U.S. banks, which were directed to raise capital and restrict dividends following the worst economic crisis since the Great Depression, have hesitated to return that money to shareholders. Dimon said last month that it may be “too ambitious” to expect a dividend increase by the end of the year. Share repurchases may come first because they don’t have to be sustained like a dividend boost, he said.

To contact the reporter on this story: Dawn Kopecki in New York at dkopecki@bloomberg.com.

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

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