Although the recession weighed heavily on its businesses, JPMorgan appears to be taking advantage of the financial crisis to leapfrog rivals in the investment banking rankings and expand its consumer lending franchise. It added another $2 billion to its consumer credit reserves for future losses and still dwarfed analysts’ expectations of earnings of 51 cents a share. JPMorgan said net income rose to 82 cents a share, from 9 cents a share in the third quarter of 2008 when panic gripped the markets. (The New York Times)
Così è la vita.
A year after accepting a bailout from Washington, a resurgent JPMorgan Chase reported another round of surprisingly strong profits on Wednesday, strengthening its position at the pinnacle of American finance.
Morgan’s results — $3.6 billion in profit for the third quarter — fanned hopes on Wall Street that, despite lingering troubles, the nation’s banking industry was entering a new period of prosperity. Indeed, the robust showing from Morgan will set the pace for other big banks because of report results in coming days.
Morgan’s profits were powered by its investment banking division, where earnings more than doubled from the year-earlier period, thanks to trading in the fixed-income markets and a flurry of deals. The results from that unit more than offset the bank’s losses on credit card loans and home mortgages, which continued to mount as consumers struggled with a weak economy.
The earnings seemed to light a fire under Wall Street. The Dow Jones industrial average was up nearly 90 points and within striking distance of 10,000.
Although the recession weighed heavily on its businesses, JPMorgan appears to be taking advantage of the financial crisis to leapfrog rivals in the investment banking rankings and expand its consumer lending franchise. It added another $2 billion to its consumer credit reserves for future losses and still dwarfed analysts’ expectations of earnings of 51 cents a share. JPMorgan said net income rose to 82 cents a share, from 9 cents a share in the third quarter of 2008 when panic gripped the markets.
“The revenue growth was very impressive,” said Anthony Polini, an analyst at Raymond James & Associates. “They’re benefiting from a turn in the economy and they’re asserting their dominance.”
The results also reflected the broader rebound in once-stymied financial markets, where companies are again issuing stock, raising money from bond markets and signing merger deals. After being forced to take huge write-downs on the value of its investment-banking assets a year ago, JPMorgan said the value of some of those assets increased in the third quarter.
James Dimon, JPMorgan’s chairman and chief executive, said the earnings reflected “broad-based” growth across the bank’s businesses but still gave only a cautious outlook. “While we are seeing some initial signs of consumer credit stability, we are not yet certain that this trend will continue,” he said in a statement.
Michael J. Cavanagh, the bank’s financial chief, added that one “hopeful sign” that fewer borrowers were falling behind on the mortgage and credit card payments, though delinquency levels remain high. But he stopped short of declaring that losses would soon peak. “We have to watch the economy and see where it heads,” he added on a conference call with journalists.
JPMorgan was the first of the nation’s biggest banks to report its third-quarter earnings. Bank of America, Citigroup and Goldman Sachs also release results later this week. And as one of the first major banks to warn of troubles with subprime mortgages, home equity loans and credit cards, it is seen as a bellwether for the financial industry.
Now, it may be among the first banks to experience a rebound. Although the housing market and economy still weak, analysts expect to see a slowdown in consumer loan losses at the biggest banks and for them to start setting aside less money in their reserves. Meanwhile, the troubles are quickly moving to bad commercial real estate loans, which will be a much heavier burden on smaller banks.
Despite growing influence on Wall Street and in Washington, Mr. Dimon must contend with several looming issues. His decision last month to replace to co-heads of the investment banking division with a single leader, James E. Staley, raised concern within the ranks. Morgan’s credit card division is unlikely to turn a profit until 2011, and like the most of the industry, its consumer franchise has seen a fall-off in new mortgage lending.
Mr. Dimon also faces obstacles in Washington. He must balance paying JPMorgan investment bankers bonuses on blow-out profits with the public backlash over Wall Street pay. New regulations on credit cards threaten to lower the profitability of that business, as could other legislative efforts to rein bank fees. JPMorgan is also a major player in the derivatives business, which will probably face more stringent regulation.
Even so, JPMorgan is emerging from the current crisis with renewed confidence. Its investment bank, which posted $1.9 billion profit, posted strong trading revenue, though short of the record levels earlier this year when the markets were in constant flux and prices skyrocketed. Meanwhile, the bank continued pick up business for corporations raising issuing bonds and selling stock to raise capital.
Chase’s consumer businesses, however, are still bleeding from the rush of bad loans. Together, its credit card and retail banking business added more than $2 billion to cover future losses, bringing its total reserves to $31.5 billion. And that is from a bank that modified more than 262,000 loans in the second quarter, representing a big chunk of the industry’s efforts.
Chase mortgage and consumer banking operations posted a narrow $7 million profit while Chase’s credit card division lost $700 million. Chase’s corporate bank, meanwhile, booked a $341 million profit even as executives set aside more money for losses on souring commercial real estate loans.
“You are seeing the underlying earnings power is there, albeit challenged by the need in this quarter to add to reserves,” Mr. Cavanagh said of the bank’s results. “Stabilization is just the first phase; we need losses to return to more normalized levels.”