JPMorgan Chase kicked off the banking industry’s earnings season, reporting on Thursday that profit fell 4 percent in the third quarter as a result of lingering mortgage troubles and weak investment banking results.
Both its consumer and Wall Street businesses were hit hard by the fiscal troubles ravaging Europe and fear of a fresh recession in the United States.
The bank announced profit of $4.26 billion, or $1.02 a share, compared with $4.4 billion, or $1.01 a share, in the period a year earlier. The results edged out analysts’ consensus estimate of 96 cents a share.
“All things considered, we believe the firm’s returns were reasonable given the current environment,” Jamie Dimon, JPMorgan’s chairman and chief executive, said in a statement.
The bank benefited from a $1.9 billion accounting gain tied to the increase in the perceived riskiness of its debt. It also charged off fewer credit cards loans and set aside less money to cover future losses in that division. Those actions helped offset an additional $1 billion pretax increase, which the bank set aside to cover potential legal claims. It also took at $542 million pretax loss in its private equity unit, and its home lending division continued to lose money.
Revenue remained under pressure, falling to $24.4 billion, an 11 percent decline from the second quarter, amid a slowdown in stock and debt offerings that had propped up the bank’s results in previous quarters. Difficult trading conditions, slimmer profit margins on lending, and the elimination of overdraft and other penalty fees also weighed on top-line growth.
As a diversified bank, JPMorgan is seen as an indicator for the financial industry, and it was among the first banks to prompt analysts to start cutting earnings estimates when it warned of a sharp fall-off in its Wall Street businesses in early September.
The other big banks will report earnings next week; Citigroup and Wells Fargo are to release their results on Monday morning, and Bank of America, Morgan Stanley and Goldman Sachs are to follow later in the week. All are expected to report a similar slowdown in their investment banking businesses, with some analysts forecasting that Goldman Sachs will report its second quarterly loss as a public company.
JPMorgan’s shares, which are down 24 percent for the year, rose nearly 3 percent, to close at $33.20 on Wednesday.
Investors are so concerned about the prospects for growth at banks that they fled the sector during the quarter. Bank stocks are down more than 30 percent since January.
Stagnant loan growth, higher capital requirements and the reduction of once-lucrative debit card swipe fees are expected to take a big bite out of profits. What is more, investors are increasingly anxious over the exposure of American banks to their counterparts in Europe, which have vast holdings of bonds backed by Greece and other nations with weak economies.
The choppy markets weighed heavily on the results of JPMorgan’s investment banking unit. Profit fell to $1.6 billion, or 20 percent, from the second quarter. Over all, trading revenue was down sharply from the period a year earlier, when market conditions were much better.
The bank’s large fixed-income and commodities operations fell 14 percent from the second quarter, while equities fell 15 percent, excluding the accounting gains taken on its debt. Investment banking fees fell 31 percent, as corporations shelved plans for acquisitions as well as stock and bonds deals, given all the uncertainty in the markets.
The news was not entirely surprising, however. In early September, Jes Staley, the head of JPMorgan’s investment bank, warned that trading revenue was likely to fall about 8 percent from the period a year earlier and projected that investment banking fees would drop by about a third.
”I think you can safely expect a decline in our markets revenue,” he said in remarks at the Barclays financial services conference last month.
Chase Home Lending, the bank’s mortgage division, continues to bleed money. Losses have improved slightly, to around $900 million this quarter, but there are few signs of a turnaround anytime soon. “We expect mortgage credit losses to remain elevated,” Mr. Dimon said in the statement.
On top of that, Chase faces billions of dollars in potential legal claims brought by the federal government and private investors seeking to recover losses on mortgage bonds backed by loans that quickly went sour. It may also have come up with several billion dollars more as part of a settlement with federal and state regulators for its role in the mortgage servicing and foreclosure mess.
The $1 billion set aside to cover claims from investors adds to the billions the bank has put into its litigation reserves over the last five quarters. The bank also established a separate reserve of several billion dollars to cover losses stemming from the repurchase of faulty loans sold to Fannie Mae and Freddie Mac, the government-controlled mortgage finance companies. Banking analysts say the mortgage problems could cost the bank up to $9 billion.
The bank’s other major businesses fared a bit better, despite the looming concerns about the job and housing markets. Chase Card Services, its credit card lending arm, posted an $849 million profit, down 8 percent from last year. Chase’s large commercial banking unit booked a $571 million profit, the result of a slight uptick in corporate lending, while Chase Retail banking, which includes the troubled mortgage group, squeezed out a $1.2 billion profit.
JPMorgan’s asset management unit posted a $385 million profit despite facing the same drop in trading-related activity as the investment bank. The bank’s treasury services posted a $305 million profit as executives tried to turn around a business that has come under heavy pressure from the low-interest rate environment.
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