Even as it weathers the worst economic downturn in decades, JPMorgan Chase on Thursday announced a $2.7 billion second-quarter profit from stellar trading and investment banking results.
The strong showing may put to rest some worries that the bank was allowed to pay back its $25 billion taxpayer investment too early, after it passed the Treasury Department’s stress test in May. But its quick resurgence in earnings, along with Goldman Sachs’s announcement of a $3.4 billion quarterly profit on Tuesday, is bound to raise fresh concerns about soaring pay levels and growing influence in Washington.
JPMorgan is emerging with renewed confidence, taking advantage of the financial crisis to vault ahead of longtime rivals in investment banking and grab market share in mortgages and retail banking. Jamie Dimon, the chief executive, has cemented his status as one of America’s most powerful and outspoken bankers. And after acquiring the retail bank Washington Mutual last fall, revenue from its new branches is starting to pad its earnings.
Even so, its consumer lending businesses have been battered by the recession. JPMorgan will set aside another $2 billion this quarter to cover future losses, bringing the total amount of money it has socked away to more than $30 billion. Credit card charge-offs have doubled from a year ago, to more than 10 percent of all loans, and will probably wipe out profits in both this year and next. Mortgage and home equity losses continued to climb, though there are some tentative signs that fewer borrowers are falling behind on the payments.
“We don’t know if it is going to sustain itself, but it could have good implications that we are getting nearer to the end,” said Michael J. Cavanagh, JPMorgan’s chief financial officer, during a conference call with analysts on Thursday. Still, he cautioned the economy remains weak and that job losses keep rising; it could be at least two more quarters before the bank stops adding to reserves.
“Nobody is through this until unemployment turns around,” said Moshe Orenbach, a Credit Suisse banking analyst. Bank of America, Citigroup, Wells Fargo face similar challenges when they report their results over the next week. So will scores of smaller, regional and community lenders.
But from its perch as one of the best-managed and most diversified banks, JPMorgan remains an important industry bellwether. JPMorgan said net income in the April-June period rose 36 percent from a year earlier, to $2.7 billion, or 28 cents a share. That compared to the $2.0 billion, or 53 cents a share, it posted a year ago during the early days of the crisis and was better than the 4 cents a share analysts surveyed by Reuters had expected. Revenue soared 39 percent from a year earlier to $25.6 billion.
But the second quarter results include many unusual items, including a $773 million accounting loss tied to an improvement in the bank’s credit spreads. It also took a $419 million after-tax charge after the Federal Deposit Insurance Corporation imposed a special assessment and a $1.1 billion charge on the money it received from the Trouble Asset Relief Program, or TARP. After passing the stress test with flying colors, the bank was deemed healthy enough to repay the taxpayer money in June. Few banks have undergone such a turnaround. Only a few years ago, JPMorgan had been struggling after years of poor management and a failure to digest a series of big acquisitions. But under Mr. Dimon, the bank cut costs and strengthened its balance sheet.
The payoff came last year. With the industry teetering on the verge of collapse, JPMorgan snapped up Bear Stearns in March and Washington Mutual last fall in two government-assisted transactions. Corporate clients say that its growing dominance has given it more leverage to charge for lending and other financial services.
It has also emboldened Mr. Dimon and his management team. After aggressively lobbying to repay the taxpayer money, Mr. Dimon has recently been driving a hard bargain over the repurchase of warrants the government received last fall. JPMorgan is now planning to let the Treasury Department auction off the warrants to private investors after the two sides failed to agree on a price.
Mr. Dimon is also gearing up for a series of battles in Washington. One is over tighter regulations for derivatives, a business where the bank generates lucrative fees as one of the industry’s largest players. Another is the establishment of a new consumer protection agency, which could threaten the profitability of the bank’s mortgage lending and credit card businesses if it introduces tougher regulations.
But in the second quarter, JPMorgan’s investment bank drove its stand-out earnings. Its bankers posted record revenues from helping other financial companies raise capital following the stress test results in May. Traders took advantage of big market swings and less competition to post big gains in fixed-income and equities.
The bank had record investment banking revenue of $7.3 billion. Globally, JPMorgan’s equity capital markets business led all contenders in the first half, rising from third place last year at the expense of Merrill Lynch and Citigroup, with $1.3 billion of revenue and a 14.5 percent share of the market, according to Dealogic data. Goldman Sachs rose to second place, with a 9.9 percent market share, from fourth place.
Chase’s consumer businesses have come under pressure as job losses mount. Over all, retail financial services posted a $15 million profit after setting aside more money as mortgage losses balloon, compared with a profit of $503 million in the period a year earlier.
Retail banking reported net income of $970 million, up from $674 million in the period a year earlier, while losses in the consumer lending businesses ballooned to $955 million, from a net loss of $171 million a year earlier, amid mounting unemployment. Card services, meanwhile, posted a $672 million loss, compared with a year-earlier profit of $250 million, as more cardholders default and revenue falls with the introduction of new rules designed to protect consumers. Mr. Dimon said on a conference call with journalists that the credit card business was unlikely to be profitable in 2009 or 2010.
Excluding the Washington Mutual portfolio, the net charge-off rate on credit cards, a measure of losses, surged to 8.97 percent in the second quarter, up from 6.86 percent in the first quarter.
The bank said in a presentation on its Web site that losses at Chase’s card services unit could reach 10 percent this year, while losses on Washington Mutual’s card portfolio would near 24 percent by the end of 2009.
Total loan-loss reserves rose to $29.1 billion, from $27.4 billion.
The bank said its tier-1 capital ratio, a measure of financial strength, stood at 9.7 percent.
nytimes
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