July 13, 2024

DealBook: JPMorgan Posts $5.4 Billion Profit, Beating Estimates

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

9:25 p.m. | Updated

Although banks have been cranking out big profits for several consecutive quarters as the spill of red ink from bad loans slowed, they have had little to show when it comes to growth.

But on Thursday, robust gains in almost all of JPMorgan Chase’s main businesses offered some hope that the industry’s prospects are not as bad as feared. Over all, the bank said second-quarter revenue climbed 7 percent to $27.4 billion — a strong showing amid a stagnant consumer economy and some of the most challenging trading conditions of the last few years.

That helped JPMorgan handily beat analysts’ consensus estimates with a profit of $5.4 billion, or $1.27 a share. Still, it was not enough to lift beaten-down bank stocks. Shares of Citigroup, Bank of America and Wells Fargo fell slightly on Thursday.

The solid revenue figures fly in the face of the dismal projections by many Wall Street analysts, who have been warning that banking is quickly returning to a boring, low-growth business. The figures also take some of the air out of the financial industry’s arguments that new regulations are depressing revenue and stifling the fragile economic recovery.

Even the chairman and chief executive, Jamie Dimon, who has raised concerns about the cost of the new rules, acknowledged that his bank would be able to make up a big part of the missing revenue. “JPMorgan will be just fine,” he said on Thursday on a conference call with reporters.

Bank officials said the revenue levels largely reflected a modest increase in lending and an uptick in fee income that could be sustained in the months ahead. For example, JPMorgan’s investment bank had a sharp increase in underwriting fees for debt and equity, as well as a big increase in deal advisory income that helped offset weaker trading results.

Its Chase retail banking unit benefited from more profitable home lending and an increase in fee income from checking accounts, debit cards and the sale of investment products. That helped it absorb charges totaling almost $1 billion to cover mortgage losses, and an additional $2.3 billion in charges tied to rising legal and foreclosure costs.

Revenue in its corporate banking, asset management and treasury services units also grew.

Only the bank’s big credit card business, Chase Card Services, had a decline in revenue from a year ago. It fell 7 percent as a result of legislation that eliminated lucrative penalty fees and its decision to shed a risky credit card portfolio it had acquired with Washington Mutual.

The rest of the banking industry has been bracing for lower top-line growth. Besides the impact of the new financial regulations, the weak job and housing markets have curtailed lending. Ultra-low interest rates are putting pressure on profit margins. And Wall Street trading revenue, which helped prop up the banks’ results in wake of the 2008 financial crisis, also has slowed.

All told, revenue for the banking industry is expected to fall more than 5 percent, to about $186 billion in the second quarter, according to Trepp, a financial research firm. That would put it near 2005 levels.

Second-quarter profits, however, are likely to be far more robust than a year ago — about $30.6 billion industrywide, up 41 percent. The reason is that many banks stand to benefit from the reversal of funds they had previously set aside to cover losses or legal claims.

That windfall can help pad bank bottom lines, even if there is little top-line growth. In JPMorgan’s case, a $1 billion benefit from the reversal in credit card loan loss reserves contributed to about 12 percent of its second-quarter, pretax earnings.

For the entire industry in the first quarter, about $12.6 billion, or roughly 43 percent of profits, came from the release of reserves. Analysts expect to see similar trends in the second quarter. Citigroup, which will report on Friday, is expected to show revenue falling about 9 percent from a year ago, according to analysts’ consensus estimates from Thomson Reuters. Net income, the analysts project, will rise about 9 percent amid lower losses on credit card and corporate loans.

At Goldman Sachs, which will report on Tuesday, revenue is expected to fall about 3.5 percent from a year ago, according to analysts’ consensus estimates. Profit could rise sharply from the second quarter of 2010, when the bank took a big charges to cover the British tax on bonuses and resolve allegations by federal securities regulators that it had misled investors on a complex mortgage deal.

Revenue at Bank of America, which also will report on Tuesday, was expected to drop about 15 percent, largely because of $20 billion worth of charges tied to the cleanup of its mortgage troubles, which it announced in late June. As a result, the bank warned that it would lose $8.6 billion to $9.1 billion.

Some analysts suggest that JPMorgan’s strong results could be the exception rather than the rule. Much depends on how banks fare in the most unpredictable of businesses — trading.

“For those who own these stocks, it was a pleasant beginning to the earnings season,” said Frederick Cannon, an analyst at Keefe Bruyette Woods. “But one point doesn’t make a line.”

Article source: http://dealbook.nytimes.com/2011/07/14/jpmorgan-chase-quarterly-profit-rises-13/?partner=rss&emc=rss

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