JP Morgan Roars Ahead

Shares of the financial giant rose Tuesday after it posted a strong rise in quarterly profit and said subprime exposure was "manageable"

JPMorgan Chase & Co. (JPM) said Apr. 18 that its earnings rose a stunning 55% during the three months ended March 31, as the New York financial services giant raked in profit from services like putting together merger and acquisition deals. Such business offset JP Morgan's losses from recent turmoil in the mortgage market.

JP Morgan's net income during the first quarter amounted to $4.8 billion, up nearly 55% compared to the same period of 2006. Revenue surged 25% year over year to nearly $19 billion. "We are very pleased with our record results this quarter," CEO Jamie Dimon said in a press release Apr. 18. "The firm's strong results include some benefit from the generally favorable credit environment, which we do not expect to continue indefinitely."

The company was not immune to the recent havoc in the subprime mortgage market, which has suffered losses during recent months as more borrowers miss payments on their loans in a tougher housing market. JP Morgan's provision for credit losses amounted to $292 million, compared to only $85 million during the same period last year. JP Morgan's retail financial services business had income of $859 million, down 2% year over year.

But JP Morgan also said its exposure to subprime mortgages is "deemed manageable," with $9 billion of debt outstanding in the current quarter and net charge-offs of $20 million, compared with $15.1 billion of loans and net charge-offs of $9 million during the same period last year. The firm has also tightened its lending standards this quarter.

JP Morgan's investment banking unit pulled off a record $1.5 billion in net income during the March quarter, up by 81% year over year. Revenue gains were driven by improvements in businesses ranging from debt underwriting to commodities.

"A healthy pipeline of M&A activity will help boost growth in the investment banking business. . . We believe these focused points, along with the continued integration and rebranding of BankOne will help JPM maintain healthy banking fundamentals and good organic earnings growth," S&P's Braden said.

Since agreeing to buy Bank One Corp. for about $58 billion in 2004, J.P. Morgan has been generating steadily improving returns, Morningstar pointed out during recent months. The bank's return on equity improved from 8% in 2005 to 12.2% in 2006. "Barring other large acquisitions, we think this metric will improve to 18% in 2011," Morningstar analyst Ganesh Rathnam predicted.

Amid its success during the first quarter, JP Morgan hiked its quarterly common stock dividend by 12% to $0.38 per share. The firm also authorized a new $10 billion common stock repurchase program, replacing the prior $8 billion program that had around $850 million of remaining authorization.

Investors bid up the company’s stock more than 4% to $52.20 per share in early trading on the New York Stock Exchange.

In one example of how analysts responded to the news, S&P on Apr. 18 hiked its earnings per share estimate for 2007 to 4.50 from $4.15 and its 12 month target price by $3 to $58 per share. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) Although S&P doesn't see such strong results as sustainable, notes analyst Frank Braden, "we are encouraged by improving margins in asset management, growth in alternative assets, and growth in commercial loans." Credit quality "remains relatively contained", says Braden, though S&P sees some added pressure on home equity loans.