Bloomberg News

JPMorgan Shares Fall as Investment-Bank Slump Weighs on Net

October 13, 2011

(Updates share price in the first and second paragraph.)

Oct. 13 (Bloomberg) -- JPMorgan Chase & Co., the second- largest U.S. bank by assets, fell 4.8 percent in New York trading after the company reported that profit declined on a slump in investment banking and trading.

JPMorgan dropped $1.60 to $31.60 at 4:15 p.m. on the New York Stock Exchange. Third-quarter earnings at the New York- based lender fell to about $3.1 billion, or 73 cents a share, not including a 29-cent accounting gain, from $4.71 billion on the same basis a year earlier.

Revenue at the investment-banking unit slid 13 percent from the second quarter as concern that Greece would default and U.S. lawmakers would fail to raise the debt ceiling roiled markets. The firm said the division will face similar market conditions for the rest of the year.

“There was a lot of noise in this number,” said Paul Miller, a former examiner with the Federal Reserve Bank of Philadelphia and analyst at FBR Capital Markets. “When you look at the core number and back out the benefit of securities gains and tax benefit, it’s starting to look like a mid-70 cent number” for earnings per share, he said.

Net income was $4.26 billion, or $1.02 a share, compared with the average per-share estimate for adjusted earnings of 92 cents in a survey of 30 analysts by Bloomberg, the New York- based company said today.

Underlying Business

The debt-valuation accounting gain “does not relate to the underlying operations of the company,” Chief Executive Officer Jamie Dimon, 55, said in a statement. Dimon said on a conference call with journalists that the after-tax effect of the accounting change was about 60 percent of the total gain for the quarter.

Matthew Burnell, an analyst at Wells Fargo & Co., estimated JPMorgan would post $350 million in gains from the change in debt valuation. U.S. accounting rules require the adjustment when the value of a company’s debt declines, under the theory that a profit would be realized if it were repurchased at a discount.

Third-quarter revenue declined 0.2 percent to $23.8 billion from a year earlier. Fixed-income and equity-markets revenue rose to $4.75 billion from $4.3 billion, driven by more than $900 million in debt-valuation adjustments.

Jes Staley, CEO of JPMorgan’s investment bank, braced investors last month for the drop in trading revenue from the second quarter, when the company generated $5.5 billion from that business. The investment bank’s staff dropped to 26,615 in the third quarter from 27,716 in the second quarter, a decline of 4 percent.

Deposit Growth

Total deposits surged 21 percent from a year earlier, to $1.1 trillion.

The company’s credit-card division, which posted losses for all of 2009, generated almost 20 percent of JPMorgan’s net income for the quarter. The investment bank accounted for 38 percent.

Fewer consumers fell behind on their credit-card payments in the third quarter. Loans at least 30 days overdue, a signal of future write-offs, fell to 2.9 percent from 4.6 percent in the same quarter in 2010 and 3.0 percent in the second quarter. Write-offs dropped to 4.7 percent from 8.9 percent the prior year and 5.8 percent in the previous quarter.

The slower decline in delinquency rates explains why the company reduced its loan-loss reserve by only $170 million, Dimon said on a conference call with analysts.

Mixed Results

“If you look at delinquencies, low rates, first-time delinquent, all that kind of stuff, they’re kind of mixed. It could very well improve again, but it’s flattened out,” Dimon said.

Brennan Hawken at UBS Investment Research in New York was expecting a reserve release closer to $1 billion.

“The worry is that they are seeing something in credit that has caused them to stop releasing reserves,” Hawken said in an interview. “That means there could be some trend going on that has caused them to be cautious.”

Retail banking, which includes home loans and checking accounts, earned $1.16 billion, compared with $383 million during the second quarter and $716 million a year earlier. The division benefited from a $370 million reduction in loan-loss provisions to $1.03 billion.

Net Interest Margin

JPMorgan, which has benefited from record low costs of funding mortgages and other assets, faces a squeeze on its net interest margin -- the difference between what it pays to borrow money and what it gets for loans and on securities.

The bank’s margin narrowed to 2.66 percent from 2.72 percent the previous quarter and 3.01 percent a year earlier.

“Trading overall in the third quarter is going to be challenged amid dislocations both home and abroad,” Jason Goldberg, a senior bank analyst at Barclays Capital in New York, said in an interview yesterday. “During the quarter, you saw both a slowdown in investment-banking activity and more challenging trading conditions amid a spike in volatility fueled by concerns in Europe.”

Slowing economic growth and heightened concern about European sovereign debt have weighed on bank stocks all year. The KBW Bank Index had dropped 28 percent this year, and the worst performer, Bank of America Corp., is down 53 percent. 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 will find a solution.

JPMorgan was the first of the major U.S. lenders to report third-quarter results.

Citigroup Inc., the third-biggest U.S. bank, may report a profit of $2.49 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 surveys of analysts shows. Bank of America may report a profit of $2.73 billion on Oct. 18.

--With assistance from Christine Harper and Michael J. Moore in New York and Bob Willis in Washington. Editors: Steve Dickson, Dan Kraut

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

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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