JPMorgan Profit Climbs 23% on Decline in Credit Costs

JPMorgan Chase & Co. said profit rose 23 percent, exceeding analysts’ estimates, as provisions for bad loans shrank. Revenue slumped 11 percent.

Third-quarter net income climbed to $4.42 billion, or $1.01 a share, from $3.59 billion, or 82 cents, in the same period a year earlier, the New York-based company said today in a statement. Twenty-two analysts surveyed by Bloomberg estimated adjusted earnings of 88 cents a share.

Profit margins at JPMorgan, the first of the largest U.S. banks to report earnings, narrowed as revenue from investment banking and card services tumbled from a year earlier and non-interest expenses rose 7 percent. Provisions for losses on mortgages, credit cards and other consumer loans fell $5.8 billion.

“Revenues continue to be lower than I expected,” Charles Peabody, an analyst at Portales Partners LLC, said in an interview with Tom Keene and Ken Prewitt on Bloomberg Radio. “You continue to see an improvement in credit quality,” he said. “Albeit in the third quarter at a slowing pace.”

JPMorgan, the country’s second-biggest bank by assets, said revenue fell to $23.8 billion from $26.6 billion a year earlier. Managed revenue, which includes the effect of some tax-exempt securities, was $24.3 billion, compared with $28.8 billion.

“That’s a little bit disappointing,” said Peabody, who had expected revenue closer to $25 billion.

JPMorgan fell 56 cents, or 1.4 percent to $39.84 at 4:15 p.m. on the New York Stock Exchange. The shares are down 4.4 percent this year.

Litigation, Rules

Banks are struggling to curb costs as they deal with litigation stemming from the global credit crisis, prepare for new capital requirements and adjust to U.S. laws banning trades with their own money and capping credit-card charges and overdraft fees. At JPMorgan, the overhead ratio, or expenses divided by revenue, climbed to 60 percent from 58 percent in the second quarter and 51 percent a year earlier.

The bank set aside $1.3 billion of additional litigation reserves during the quarter, which includes expenses for “mortgage-related matters,” it said in the statement.

“You know our society, right?” Chief Executive Officer Jamie Dimon, told analysts on a conference call today, when asked about mounting court costs, such as from cases tied to Bear Stearns Cos. and Washington Mutual, which the bank bought during the credit crisis.

‘Going to Fight’

“You know how many suits go on, the class-action suits, the stock drop, the Bear Stearns suits, the WaMu suits, the mortgage suits,” said Dimon, adding that not all reserves are linked to mortgages. “And it ain’t going away, it’s becoming a cost of doing business,” he said. “When we’re wrong, we’re going to settle, and when we’re right, we’re going to fight.”

While provisions for future losses fell, JPMorgan charged off $1.2 billion on home-equity and other mortgage loans as the U.S. unemployment rate remained near a 26-year high. It also took a $1.5 billion loss on bad loans it was forced to repurchase from investors.

“We expect mortgage credit losses to remain at these high levels for the next several quarters,” Dimon, 54, said in the statement. “If economic conditions worsen, mortgage credit losses could trend higher.”

Dividend Increase

JPMorgan has repurchased $2.6 billion of its own shares so far this year. Dimon said he hopes to raise the dividend in the first quarter of 2011.

Bank of America Corp. and Citigroup Inc., the first-and third-largest U.S. lenders by assets, respectively, may report adjusted earnings of $1.1 billion and $1.8 billion when they release results next week, the Bloomberg survey shows.

Retail banking earned $907 million, compared with $1.04 billion during the second quarter and $7 million a year earlier. The division benefited from a reduction in provisions to $1.55 billion from $3.99 billion in the prior year, JPMorgan said.

Credit-card services earned $735 million, compared with $343 million in the prior three months and a $700 million loss a year earlier. Revenue fell 18 percent to $4.25 billion from a year earlier. The bank reduced provisions against future losses in the business by $3.33 billion.

Net income in investment banking declined 33 percent, to $1.29 billion in the third quarter from $1.92 billion a year earlier, even after benefiting from the release of $142 million in reserves back into earnings. A year ago, the bank set aside $379 million for reserves.

Fixed Income, Underwriting

Fixed-income revenue was $3.1 billion, compared with $5 billion a year ago and $3.6 billion in the second quarter.

The investment bank contributed $1.29 billion of JPMorgan’s $4.42 billion in net income, or 29 percent. That compares with 29 percent in the second quarter and 54 percent in the third quarter of 2009.

Dimon kept the bank profitable throughout the financial crisis, relying on fee income to counter loan losses in mortgage lending and credit cards. The bank was the No. 1 underwriter of stocks and bonds in the U.S. in the first three quarters of 2010.

Financial companies have recorded losses and writedowns of $1.83 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.

Credit Cards

The U.S. jobless rate has held steady or fallen after peaking at 10.1 percent in October 2009, according to U.S. government data. It was 9.6 percent in September.

“You’re not really getting a lot of new people falling into unemployment, which stabilizes the credit-card portfolios,” said Paul Miller, a former examiner for the Philadelphia Federal Reserve Bank and an analyst at FBR Capital Markets. “Credit continues to be flat this quarter.”

The Federal Reserve’s policy of keeping interest rates low, which has helped boost bank earnings over the last six quarters, is beginning to make it harder for the biggest U.S. lenders to make money.

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. Analysts say the margins may have peaked in the first half and that banks will struggle to replace high-yielding assets as they pay off.

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 3.01 percent in the third quarter, from 3.06 percent in the second quarter and 3.1 percent a year earlier.

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