DealBook: JPMorgan Profit Rises 67%, but Bad Loans Persist

Saul Loeb/Agence France-Presse — Getty Images Jamie Dimon, JPMorgan Chase’s chief.

8:18 p.m. | Updated

Even as JPMorgan Chase reported a 67 percent increase in first-quarter earnings on Wednesday, the problems in its troubled home lending unit kept piling up.

Bad mortgages and home equity loans cost the bank $1 billion in the first quarter, bringing total residential real estate losses since the financial crisis began to more than $20 billion.

To make matters worse, bank officials said they expected these high loss levels to persist, and acknowledged that new mortgage lending had stalled. Mortgage originations fell 29 percent from the fourth quarter, as higher rates deflated the refinancing boom that propped up the business for much of 2010.

Still, strong results from JPMorgan’s investment bank as well as the release of $2 billion that had been set aside earlier to cover credit card losses offset the mortgage mess and contributed to a record $5.6 billion quarterly profit.

As the first of the major banks to report their first quarter results, JPMorgan is closely watched as a bellwether for both Wall Street and the broader banking industry. Analysts suggested there was an increasing divergence in performance between Wall Street activities like trading and investment banking and more traditional retail lending. Bank of America, Wells Fargo, Citigroup and other big financial institutions face a similar challenge as they report earnings this month.

“There just is not enough economic strength to fuel loan growth,” David Trone, a banking analyst at JMP Securities, said. “That traditional part of banking is just very stagnant.”

Revenue fell 8 percent to $25.8 billion, underscoring the challenge banks face as they try to expand their underlying businesses amid a still-sluggish economy and new government rules that restrict lucrative sources of income like overdraft fees.

Then there is the cleanup bill for the foreclosure crisis. On Wednesday afternoon, JPMorgan’s mortgage unit, Chase Home Lending, and 13 other servicers took a major step in putting their troubles behind them when they struck a deal with federal regulators to make sweeping changes to their loan servicing operations.

Chase Home Lending plans to add 2,000 to 3,000 employees, create a separate unit to handle troubled mortgages and strengthen its internal controls. These moves forced the bank to take a one-time $1.1 billion charge in the first quarter to reflect the higher operating costs resulting from the new mortgage practices.

The company also recently announced several prominent management changes at Chase Home Lending.

“We are adding a lot of intensive manpower and talent to fix the problems of the past,” Jamie Dimon, JPMorgan’s chairman and chief executive, said on a conference call with reporters.

The moves are aimed at addressing the problems flagged by regulators after a public uproar over foreclosure practices last fall. JPMorgan, Bank of America, GMAC, Wells Fargo and other big lenders were forced to review tens of thousands of mortgage files after revelations of paperwork mistakes and other errors. In some cases, those institutions were also forced to temporarily halt foreclosures across the country.

The settlement with federal regulators still leaves open the possibility of fines and other legal actions. But it does not end separate settlement talks with state attorneys general, who have been pressing the banks to expand their mortgage modification programs and to pay at least $20 billion in penalties.

Nor does Wednesday’s agreement with federal regulators address a flurry of lawsuits from private investors seeking to recover losses on troubled loans and securities the bank sold.

Although there has been little progress in the negotiations with either the attorneys general or investors, the bank has been setting aside money for any eventual deals. JPMorgan put aside an additional $650 million in the first quarter to cover these potential legal claims and other foreclosure-related costs, after increasing its litigation reserves by more than $6.7 billion in 2010.

The bank also added $420 million to a separate reserve to cover expected losses stemming from the repurchase of faulty loans that it had sold to Fannie Mae and Freddie Mac, the government-controlled housing finance companies. Previously, it had set aside more than $5.6 billion for these claims.

“I think a good global settlement will be good for everybody,” Mr. Dimon said. “Keeping this mess going on is not good for anybody.”

The number of mortgage troubles overshadowed an otherwise solid quarter for most of the bank’s other businesses. JPMorgan’s quarterly profit of $5.6 billion, or $1.28 a share, exceeded analysts’ estimates and was a sharp increase over the $3.3 billion, or 74 cents a share, that the company earned a year earlier.

Indeed, JPMorgan’s investment bank posted a $2.4 billion profit, down 4 percent from a year ago, when unusually strong trading results helped fuel a record profit.

Investment banking fees were up 23 percent, as JPMorgan benefited from dozens of new deals, including ATT’s $39 billion planned acquisition of T-Mobile USA. Fixed income trading revenue was up 33 percent from the prior year, while revenue from its equities group fell 8 percent on lower trading volumes.

The corporate bank, which provides loans to mid-size companies, reported earnings of $546 million, up 3 percent from the period a year earlier. Bank officials pointed to a marked improvement in the number of mid-size businesses seeking credit.

The credit card division reported a $1.3 billion profit, up 3 percent from the period a year earlier. But much of that gain was a result of the bank’s decision to release about $2 billion it had previously set aside to cover losses.

This post has been revised to reflect the following correction:

Correction: April 13, 2011

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