JPMorgan Chase profit falls 53 pct on loan losses

The bank's shares gained nearly 5 percent in pre-market trading Thursday. 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.

JPMorgan Chase & Co. 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, like its competitors, has a tough environment to slog through.

The capital markets remain tight. 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.

And credit trends in prime mortgages, subprime mortgages and home equity loans are all worsening, JPMorgan executives said. They are seeing the pace of home equity loan deterioration slow somewhat, but prime mortgage problems are escalating as home prices tumble.

The charge-off rate for JPMorgan's 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.

In the coming quarters, "those losses could triple from here," said Chief Executive Jamie Dimon during a conference call with analysts. "Prime looks terrible."

Jumbo mortgages are loans that exceed the maximum set by government entities Fannie Mae and Freddie Mac; alt-A mortgages are given to people with minor credit problems or who lack proper documentation to get a traditional prime loan.

JPMorgan 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.

"Our expectation is for the economic environment to continue to be weak — and to likely get weaker — and for the capital markets to remain under stress," Dimon said in a statement. "We remain conscious that since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer."

Dimon added, however, that because of the bank's strong capital base, it "can continue to invest for the future."

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.

Shares rose $1.71, or 4.8 percent, to $37.65 in pre-market trading. The stock is down about 28 percent over the past year.

In a note to clients, Deutsche Bank analyst Mike Mayo said that 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.