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JPMorgan’s Net Income Sets Record on Reserve Releases

JPMorgan Chase CEO Jamie Dimon
Jamie Dimon, chief executive officer of JP Morgan Chase & Co. Photographer: Tim Boyle/Bloomberg

JPMorgan Chase & Co., the second-biggest U.S. bank by assets, posted a record $4.83 billion profit, buoyed by $2 billion in reserves added back to earnings as credit quality and the U.S. economy improved.

Fourth-quarter net income, which rose 47 percent, was $1.12 a share, compared with $3.28 billion, or 74 cents, in the same period of 2009, the New York-based company said today in a statement. The results compared with an average per-share estimate for adjusted earnings of $1 projected by 25 analysts surveyed by Bloomberg. The shares rose as much as 2.9 percent to a nine-month high.

JPMorgan, led by Chief Executive Officer Jamie Dimon, was the only major U.S. bank to remain profitable throughout the financial crisis. The company’s record $17.4 billion in earnings last year were boosted by about $7 billion in pretax reserve releases on the better economic forecast, an improvement that Dimon, 54, said he doesn’t count as actual earnings.

“We only take down reserves pretty much when we have to” because of accounting requirements, Dimon told reporters on a conference call today. “We don’t really want to. It isn’t like we’re doing it to report earnings. I don’t look at it as earnings.”

JPMorgan rose 46 cents, or 1 percent, to $44.91 in New York Stock Exchange composite trading. The cost to protect the company’s debt declined as credit-default swaps fell 1.4 basis points to 79.1 basis points, according to broker Phoenix Partners Group.

CDS Prices Rise

“Five of the six businesses are showing improvements,” said Richard Bove, a bank analyst at Rochdale Securities in Lutz, Florida. “The revenue momentum is positive.”

Dimon reiterated his desire to restore the company’s quarterly dividend, which was cut to 5 cents a share in 2009, as soon as regulators allow. For Bove, “these are the factors that will push the stock up or down ultimately, not the accounting mumbo-jumbo with reserves.”

The credit-card division, which lost money for all of 2009, generated 27 percent of JPMorgan’s net income for the quarter. The investment bank accounted for 31 percent.

While Dimon called the U.S. housing market still “terrible,” he said it’s better than it was a year ago. The bank put $1.5 billion in litigation reserves to cover costs related to buying back faulty mortgages. It also set aside $2.1 billion more against soured loans from Washington Mutual, the lender JPMorgan bought in 2008.

Private Label

Dimon said most of the new litigation reserves are intended for so-called private-label mortgages, which are not insured by the federal government or federally controlled mortgage companies Fannie Mae and Freddie Mac. He said it will take years to resolve those disputes and to determine the ultimate cost to JPMorgan.

“It’s going to be a long ugly mess, but it won’t be life-threatening to JPMorgan,” he told analysts on a separate call. “We will be talking about this for every quarter over the next three years.”

JPMorgan is the first of the largest U.S. banks to report earnings. Citigroup, the third-biggest U.S. lender behind JPMorgan and Bank of America Corp., may report fourth-quarter profit of $2.19 billion when it releases results on Jan. 18, the survey of analysts shows. Charlotte, North Carolina-based Bank of America may report a profit of $2.61 billion on Jan. 21.

Fourth-quarter revenue at JPMorgan rose 13 percent to $26.1 billion. Fixed-income and equity markets revenue was $4 billion, compared with $3.7 billion a year earlier and $4.3 billion in the third quarter.

Credit Cards

While home-lending and credit-card losses continued to weigh on earnings, the company set aside fewer provisions for future losses in both divisions and released $2 billion in reserves against credit-card loans.

Fewer consumers fell behind on their credit-card payments in the fourth quarter. Thirty-day delinquency rates dropped to 4.1 percent from 6.3 percent in the same quarter in 2009 and 4.6 percent in the third quarter. The rate of credit cards charged off as bad debt also fell to 7.8 percent from 9.3 percent the prior year and 8.9 percent in the previous quarter.

“Consumer credit continues to improve across the board,” said Paul Miller, a former examiner for the Philadelphia Federal Reserve Bank and analyst at FBR Capital Markets.

Retail banking earned $708 million, compared with $907 million during the third quarter and a $399 million loss a year earlier. The division benefited from a $1.8 billion reduction in provisions to $2.5 billion, JPMorgan said.

Card Services

Credit-card services earned $1.3 billion, compared with $735 million in the prior three months and a $306 million loss a year earlier. JPMorgan reduced provisions against future losses by $3.5 billion.

Net income in investment banking declined 21 percent, to $1.5 billion in the fourth quarter from $1.9 billion the year before, even after benefiting from the release of $271 million in reserves back into earnings, compared with a $181 million gain the prior year.

“The numbers don’t look nearly as strong as the headlines would suggest,” a group of strategists led by Michael Reiner at Societe Generale SA wrote in a note today after the earnings report. “A large portion of the earnings beat came from a large drop in loss provisions at JPM’s credit-card segment.”

Margin Squeeze

JPMorgan and other large banks, which have benefited from record low costs of funding mortgages and other assets, face a squeeze on net interest margins -- the difference between what they pay to borrow money and what they get for loans and on securities.

The net yield on interest-earning assets -- what the bank collects on interest on loans and securities minus what it pays out on deposits and other borrowings -- dropped to 2.88 percent in the fourth quarter, from 3.01 percent in the third quarter and 3.02 percent a year earlier.

Financial companies have recorded losses and writedowns of at least $1.82 trillion stemming from the U.S. housing crisis and the highest U.S. jobless rate in 26 years, according to data compiled by Bloomberg. The pace of new problem loans eased over the last two quarters as the U.S. economy recovered, even after the federal government withdrew support from financial markets.

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