JPMorgan profit sinks as credit deteriorates

October 15, 2008 11:42:12 AM PDT
JPMorgan Chase & Co.'s profit tumbled 84 percent in the third quarter after it took big hits from souring mortgage investments, leveraged loans and home loans. Profit at the New York-based bank, considered one of the stronger players in the current financial meltdown, came in better than Wall Street anticipated. But the deterioration seen in all types of loans - from home equity loans to prime mortgages to credit cards - bodes badly for a banking industry that is requiring unprecedented investment from the federal government.

CEO Jamie Dimon said during a conference call that he expects market conditions to improve from its heightened turbulence after recent moves by the government, and that JPMorgan is still offering loans. But the bank, like others, is lending at more old-fashioned, disciplined standards in anticipation of an even weaker economy and accelerating loan losses.

"If you're not fearful, you're crazy," Dimon said.

The company, which bought Washington Mutual Inc. late last month and Bear Stearns Cos. in March, earned $527 million, or 11 cents per share. That was down from $3.4 billion, or 97 cents per share, a year earlier.

Analysts polled by Thomson Reuters had predicted a loss of 21 cents per share.

Shares fell 44 cents to $40.27 in morning trading.

Still, revenue fell below expectations, dropping nearly 20 percent to $14.74 billion from $18.40 billion in the third quarter of 2007. Analysts predicted revenue of $16.01 billion.

JPMorgan's investment bank wrote down $3.6 billion from its mortgage investments and leveraged lending exposures, due largely to the troubled assets at Bear Stearns. It also boosted loan loss reserves by $1.3 billion to $15.3 billion, or $19 billion including Washington Mutual, to prepare for a worsening environment for lending.

Home equity loans continue to deteriorate_ charge-offs rose to $663 million from $511 million in the previous quarter and $150 million a year ago. They're expected to rise to as much as $800 million in the next several quarters, the bank said.

Subprime and prime mortgage trends are worsening, too. Subprime charge-offs rose to $273 million from $192 million in the second quarter and $40 million a year ago, while prime mortgage charge-offs rose to $177 million from $104 million in the second quarter and $9 million a year ago. JPMorgan anticipates subprime charge-offs to rise to as much as $425 million by early 2009, and prime charge-offs to rise to $300 million by that time.

And more customers failed to make their credit card payments. The card charge-off rate edged up to 5 percent from 4.98 percent in the second quarter and from 3.64 percent a year ago. JPMorgan expects this rate to rise to 6 percent early next year, and to 7 percent late next year.

The bank's quarterly results included a charge of $1.2 billion to conform loan loss reserves after buying Washington Mutual's banking operations, and a gain of $581 million related to the acquisition. WaMu - the largest bank to fail in U.S. history - was sold by the Federal Deposit Insurance Corp. to JPMorgan for $1.9 billion late last month.

JPMorgan saw an after-tax loss of $642 million during the third quarter due to its exposure to Fannie Mae and Freddie Mac, and an after-tax charge of $248 million related to auction-rate securities.

The bank's markdowns and losses were partially offset by double-digit net income growth in the bank's commercial banking and Treasury and securities services businesses. The company also raised $11.5 billion through stock sales during the quarter, and benefited by $927 million, after-tax, from reduced deferred tax liabilities.

The U.S. government announced Tuesday that it will spend $250 billion buying stakes in major financial institutions, including JPMorgan. Dimon said during a conference call that JPMorgan "didn't need the money," but that he didn't want to "stand in the way" of helping broader financial system.

"The Treasury plan, and all the things leading up to the plan, is very powerful stuff. It will eventually unclog the system," he said.

Dimon said he is not yet sure how JPMorgan specifically will use its $25 billion, but that he intends to use it to benefit shareholders and customers.

"It's clear that the government would like us to use the money to make loans," Dimon said. But, he added, "I don't think the government is telling us what to do with the capital."

The credit markets seized up after the bankruptcy of Lehman Brothers Holdings Inc. and the near-collapse of American International Group Inc. The government's plans over the past few weeks to boost lending, slash interest rates, buy short-term corporate debt and take stakes in private banks have begun to help, at least at the margins, get financial institutions and investors lending again.


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