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BUSINESS
JPMorgan bests forecasts but sees U.S. credit worsen
NEW YORK -- The banking sector looked a little brighter for a second straight day Thursday after JPMorgan Chase & Co. reported better-than-expected results despite a spoke in mortgage and other loan defaults.
The bank's shares gained more than 12 percent Thursday after it reported a 53 percent drop in profit. Following Wells Fargo & Co.'s stronger-than-expected results released Wednesday, investors appear more confident that the banking sector, while struggling, will be propped up by some of its healthier players.
However, JPMorgan Chase, like its weaker competitors, still has a tough environment to slog through as the aftermath of the mortgage and credit crisis continues. Even the bank's more creditworthy borrowers are now failing to make their mortgage payments -- the charge-off rate for prime mortgages, which include more than $34 billion in jumbo mortgages and $2.5 billion in alt-A mortgages, nearly doubled from the first quarter to the second, from 0.48 percent to 0.91 percent.
"They're staggering numbers. We have all the politicians telling people it's OK not to pay your mortgages," said JPMorgan Chase Chief Executive Jamie Dimon during a call with analysts. He said it's hard to predict how the prime mortgage trends will progress throughout the rest of 2008, but "our current expectation is those losses could triple from here."
Jumbo mortgages are loans that exceed the maximum set by government entities Fannie Mae and Freddie Mac, and alt-A mortgages are given to people with minor credit problems or who lack proper documentation to get a traditional prime loan.
The main culprit is home prices, which are still tumbling.
"Even if it's a prime mortgage, it could still be under water -- even if they can afford to pay, people might be likely to walk," said Celent analyst Bart Narter.
JPMorgan Chase earned $2 billion, or 54 cents per share, in the April to June period, down from $4.23 billion, or $1.20 per share, in the same time frame last year. Revenue slipped 3 percent to $18.4 billion. Analysts surveyed by Thomson Financial had predicted, on average, a profit of 44 cents share on $16.6 billion in revenue.
JPMorgan took a provision for credit losses of nearly $3.5 billion, or $4.3 billion when the effect of securitized credit cards -- which are off the bank's balance sheet -- are included.
The bank also lost more than half a billion dollars due to Bear Stearns Cos., the ailing investment bank it bought in March with the help of the government. JPMorgan marked down the value of its investment bank holdings by $1.1 billion, and bulked up its reserves by $1.3 billion. The bank's total allowance for future loan losses now stands at $13.9 billion.
Dimon said he expects the economic environment to weaken and for the capital markets to remain strained, and that these risks will affect the business for the rest of the year or longer.
Credit card defaults could pose a big problem for the bank going forward. During the second quarter, JPMorgan charged off nearly 5 percent of its $153 billion outstanding in credit cards -- that's about $7.6 billion.
The bank said it expects losses of about 5 percent or more in credit cards during the second half of the year, and possibly 6 percent on average in 2009.
"That can turn into real money," Celent's Narter said.
And as credit trends across the board deteriorate, the tight capital markets are keeping it hard for banks and other companies to borrow and lend.
Bank of New York Mellon Corp. said Thursday its second-quarter earnings also fell, as the bank was slammed by transaction charges involving leveraged leases and investment securities write-downs. It second-quarter profit fell 31 percent, and its shares dropped $2.80, or 7.3 percent, to $35.40.
JPMorgan's shares, however, rose $4.50, or 12.5 percent, to $40.44 by late afternoon trading.
Hardy growth in the business of providing traditional banking services and loans to individuals and companies around the world gave JPMorgan a boost. The commercial banking and Treasury & securities segments both saw record earnings and revenue.
In a note to clients, Deutsche Bank analyst Mike Mayo said JPMorgan's outlook was "more subdued," but that "JPMorgan showed this quarter that it is one of the few financial firms that are playing offense and showing revenue growth while many others are not."
In May, JPMorgan closed its acquisition of the 85-year-old Bear Stearns. The deal was worth a total of $2.3 billion: JPMorgan spent $1.4 billion for the firm itself, and an additional $900 million buying up Bear Stearns stock to ensure the deal's approval.
JPMorgan's tier-1 capital ratio -- essentially, a company's capital versus its debt -- was at 9.1 percent at the end of the second quarter. Cavanagh said that without the U.S. government's temporary debt relief for Bear Stearns, that ratio would be at 8.1 percent -- still well above what regulators deem "well-capitalized."
The integration of Bear Stearns is expected to cost JPMorgan another $500 million, after tax. Eventually, JPMorgan expects Bear Stearns to contribute about $1 billion to annual income by the end of 2009.
