DealBook: JPMorgan’s Quarterly Profit Rises 13%, to $5.4 Billion

Andrew Harrer/Bloomberg NewsJamie Dimon, chief of JPMorgan Chase.

9:27 a.m. | Updated JPMorgan Chase reported on Thursday that second-quarter profit rose 13 percent, to $5.4 billion, from the period a year earlier, despite lingering mortgage troubles and lackluster trading results.

It was a decent start to earnings season for the banking industry, which is confronted by a stagnant economy in the United States, fiscal troubles in Europe and global regulatory uncertainty.

Despite market weakness, JPMorgan had a solid showing in its Wall Street businesses. The results on the consumer side were varied. With credit defaults on the decline, the bank saw a $1 billion benefit from the reversal of more funds that had been set aside for loan losses. Even so, the home lending unit continued to struggle, as the bank added $1.3 billion to its litigation reserves mainly related to the mortgage business.

Overall, JPMorgan announced a profit of $5.4 billion during the second quarter, or $1.28 a share, easily besting analyst consensus estimates of $1.21 a share. Earnings were down modestly from the $5.6 billion, or $1.29 a share that it earned in the first quarter, when its investment banking unit had an unusually strong trading record.

Revenue — under pressure across the banking industry – was relatively strong. At JPMorgan, it rose 7 percent from a year earlier to $27.4 billion, even as a slowdown in mortgage lending and fixed-income trading cut into the bank’s income. Douglas Braunstein, the bank’s chief financial officer, said that level of activity would be sustainable.

“It’s largely business as usual,” he said on a conference call with journalists.

The strong earnings at JPMorgan, a diversified bank that is often considered a crucial indicator for the rest of financial industry, could give a much-needed jolt to bank stocks, which have fallen sharply over the last few weeks. Shares of JPMorgan were up more than 3.5 percent in pre-market trading. Citigroup reports on Friday, while Bank of America, Goldman Sachs, Wells Fargo, and Morgan Stanley will release their results in the coming weeks.

Still, investors are increasingly worried about the banks’ prospect for growth. Troubling unemployment trends, higher capital requirements, and the eliminating of lucrative fees are raising questions about where they will find new sources of revenue. Stock and bond trading, which has helped prop up the banks results over the last two years, is waning as nervous investors rush to the sidelines with cash.

Jamie Dimon, JPMorgan’s chairman and chief executive, put a positive spin on his bank’s second quarter results. In a statement, he praised a “solid performance across most of our businesses” and noted a marked improvement in credit that was approaching a “more normalized environment” in both its consumer and corporate lending operations. The financial firm felt comfortable enough to buy back $3.5 billion of stock during the second quarter.

But questions loom over two of its biggest businesses: its home lending unit and its investment bank.

With mortgage losses running at almost $5 billion a year, Mr. Dimon replaced several of the managers responsible for running the unit in late June and vowed to fix past mistakes. But troubled loans keep haunting the bank.

The firm faces billions of dollars in potential legal claims stemming from the housing crisis. Federal and state regulators are leaning hard on it and other large servicers to radically overhaul servicing operations, changes that are driving up costs.

Then there’s the expected settlement over mortgage issues. Bank of America warned late last month that it planned to absorb a $20 billion hit to its earnings to clean up its mortgage – and it still could add billions more to cover future losses. Although JPMorgan moved faster that peers to address the issues, it could take awhile to put their mortgage problems behind.

In the statement, Mr. Dimon said that despite a modest improvement in loan performance, he expected that losses would remain elevated. The bank also took another $1 billion charge to cover increased foreclosure expenses and the cost of an expected regulatory settlement, on top of the $1.1 billion hit it took in the first quarter to cover the spiraling costs of servicing loans.

“We have been working hard to fix our problems and address past mistakes,” he said. “Unfortunately, it will take some time to resolve these issues and it is possible that we will incur additional costs along the way.”

The bank put aside another $1.3 billion in the second quarter to cover legal claims from investors seeking to recoup losses on loans that went bad. JPMorgan has added over $7.3 billion to its litigation reserves over the last five quarters, and established a separate reserve of more than $5.6 billion to cover losses stemming from the repurchase of faulty loans sold to Fannie Mae and Freddie Mac, the government-controlled finance companies.

Banking analysts say the mortgage problems could cost the bank up to $9 billion. But armed with those reserves, JPMorgan Chase executives have said they have ample resources to cope with the expected losses.

JPMorgan’s investment bank fared better. Its fixed-income and commodities operations were particularly hard hit, falling more than 18 percent from the first three months of the year amid a sharp reversal in the markets in early May. Stock trading revenue was down 13 from the first quarter because of lower volumes.

But the investment bank benefited from an improvement in its credit portfolio as well as strong performance in its deal advisory and equity writing businesses. Investment banking fees rose 8 percent from first quarter.

The bank’s other major businesses performed well, despite the challenging economic environment. Its credit card lending arm posted a $911 million profit after yet another big release of funds it had set aside to cover losses. The big commercial banking unit booked a $611 profit, amid a 9 percent increase in revenue.

Chase Retail banking, which includes the troubled mortgage group, squeezed out a $582 million profit. Meanwhile, the asset management and treasury services units also had decent quarters amid the turbulent markets.

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