JPMorgan Net Income May Show 10% Decline on Investment Banking

JPMorgan Chase & Co. CEO James Dimon
James "Jamie" Dimon, chief executive officer of JPMorgan Chase & Co., right, led the bank to a record $17.4 billion in net income last year, the most of any U.S. bank. Photographer: Andrew Harrer/Bloomberg

JPMorgan Chase & Co. may say profit slid 10 percent in the third quarter, the biggest drop in more than two years, as Europe’s credit crisis and the U.S. debt-ceiling debate spoiled optimism for an economic recovery.

Tomorrow’s report from the New York-based bank will probably show earnings of $3.96 billion, according to the average estimate of 18 analysts surveyed by Bloomberg. That compares with $4.42 billion a year earlier and $5.43 billion in the three months ended June 30.

Jes Staley, chief executive officer of JPMorgan’s investment bank, braced investors last month for a 30 percent drop in trading revenue from the second quarter, when the company generated $5.5 billion from that business. He said fees from investment banking would tumble almost 50 percent to $1 billion. About $2 trillion in corporate bond issues came to market in the first half before volume plummeted to about $550 billion in the third quarter, data compiled by Bloomberg show.

“We expect another challenging quarter for the universal bank group,” Frederick Cannon and David Konrad, analysts at Keefe, Bruyette & Woods Inc. in New York, wrote in an Oct. 10 research note. “Declining markets and elevated volatility is expected not only to slow investment-banking and trading revenues but also to cause negative marks in investments.”

JPMorgan, the first of the major U.S. banks to report third-quarter earnings, will be a barometer for the rest of the industry and the broader U.S. economy, the analysts wrote.

Reserve Releases

CEO Jamie Dimon, 55, led the bank to a record $17.4 billion in net income last year, the most of any U.S. bank. Earnings were buoyed by the release of $7 billion in reserves back into income as the U.S. economy improved, a benefit that may have continued in the third quarter and helped “soften the blow,” Jason Goldberg, an analyst at Barclays Capital in New York, wrote in an Oct. 7 research note.

At the same time, legal costs to settle lawsuits and other claims against the company’s soured mortgage book will continue to erode earnings, the analysts said.

The bank, whose $2.25 trillion in assets as of June 30 makes it second to Charlotte, North Carolina-based Bank of America Corp., is “the safe play” for investors in the sector, Cannon and Konrad said.

Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and analyst with FBR Capital Markets in Arlington, Virginia, instead recommends that investors either “stay on the sidelines” or place their bets on better capitalized banks such as Wells Fargo & Co., PNC Financial Services Group Inc. and U.S. Bancorp, he said in an Oct. 10 research note.

Citigroup, Wells Fargo

New York-based Citigroup Inc., the third-biggest U.S. lender, may report a profit of $2.5 billion when it releases results on Oct. 17, and Wells Fargo, based in San Francisco, will probably say it earned $3.87 billion when it announces results the same day, the survey of analysts shows. Bank of America may report a profit of $2.69 billion on Oct. 18 while Goldman Sachs Group Inc. may say it earned $45.3 million.

Slowing economic growth and heightened worries about European sovereign debt have weighed on bank stocks all year. None of the 24 members of the KBW Bank Index has posted a gain in 2011, and the worst performer, Bank of America, is down 52 percent through yesterday. A jump in borrowing costs at some banks, including New York-based Morgan Stanley, subsided last week as investors became more optimistic that European Union policy makers would solve the sovereign debt and banking crisis.

Political ‘Incompetence’

“American and EU politicians reached the limit of their incompetence many months ago,” Christopher Whalen, founder of Institutional Risk Analytics, said in a research note yesterday. “We see the lack of business volumes and political uncertainty going into 2012 as far more troubling trends in terms of non-interest revenue sources for all financials.”

Frederic Janbon, the global head of fixed-income at Paris-based BNP Paribas SA, said in an interview that financial markets have become “almost as dysfunctional and illiquid as they were in 2008.”

“The market is very difficult to trade and highly sensitive to political news,” Janbon said. “Political risk has moved to the forefront of people’s minds when looking at the U.S. and Europe. Since July, anticipation of global economic slowdown has fundamentally changed this situation. Anxiety has now spread to all credit products.”

Loan growth in the U.S. remains stagnant and net interest margins, which measure the profit margin on lending, continue to decline. Bank loans and leases fell $2.1 billion to $6.829 trillion from August 2010 through Sept. 28, according to Federal Reserve data.

Financial companies have recorded losses and writedowns of $2.09 trillion stemming from the U.S. housing crisis, according to data compiled by Bloomberg.

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