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JPMorgan Profit Rises, Beating Estimates

JPMorgan Chase & Co., the second- biggest U.S. bank by assets, said profit rose 76 percent, more than analysts estimated, as a reduction in provisions for soured mortgages and credit-card loans buoyed results.

Second-quarter net income climbed to $4.8 billion, or $1.09 a share, from $2.72 billion, or 28 cents, in the same period a year earlier and from $3.33 billion in the first quarter, the New York-based company said today in a statement. The per-share earnings compared with an average estimate for adjusted earnings of 71 cents projected by 22 analysts surveyed by Bloomberg.

“It’s great to see credit finally confirmed, that the trend is improving,” Gary Townsend, president of Hill-Townsend Capital LLC in Chevy Chase, Maryland, a hedge fund that specializes in financial firms, said in a Bloomberg Television interview. “The earnings estimates for this company are going up,” said Townsend, who owns JPMorgan shares.

Chief Executive Officer Jamie Dimon, 54, who has kept the bank profitable by relying on investment-banking revenue, said the results were “still unacceptable” because consumer lending charge-offs and late payments remain high. The company cut provisions for bad loans in the retail-banking business by $2 billion in the second quarter as investment-banking profit dropped 44 percent from the first quarter.

JPMorgan rose to $40.54 in New York trading from $40.15 at the close on the New York Stock Exchange yesterday. The shares are down 3.2 percent this year through yesterday.

Revenue Drops

Second-quarter revenue fell 7.6 percent to $25.6 billion. Fixed-income revenue was $3.6 billion, compared with $4.9 billion a year earlier and $5.46 billion in the first quarter.

While home-lending and credit-card losses continued to weigh on earnings, the company set aside fewer provisions for future losses in both divisions. Retail banking earned $1.04 billion, compared with a $131 million net loss during the first quarter and a $15 million gain a year earlier. The division benefited from a reduction in provisions to $1.7 billion from $3.73 billion the prior year, JPMorgan said.

Credit-card services earned $343 million, compared with a net loss of $303 million in the prior three months and a $672 million loss a year earlier. JPMorgan reduced provisions against future losses by $2.4 billion.

Problem Assets

“People can debate whether that is artificially inflating the quality of earnings,” said Christopher Wolfe, a bank debt analyst at Fitch Ratings in New York. “If you think banks have identified their problem assets, then that’s valid. If you think banks have problem loans that they haven’t come clean about, then that would be a concern.”

He said the industry is generally well reserved given the amount of non-performing loans on bank books.

Dimon said in the statement that it’s “to early to say” how much credit trends will improve.

“Although we are gratified to see consumer-lending net charge-offs and delinquencies decline, they remain at extremely high levels and therefore returns in our consumer-lending businesses are still unacceptable,” Dimon said.

Net income in investment banking declined 6.1 percent from a year earlier, to $1.39 billion in the second quarter, even after benefitting from the release of $325 million in reserves back into earnings, compared to an $871 million expense the prior year.

Underwriting Results

Bond and equity issuance fell in the second quarter as weak economic data and the European debt crisis damped investor demand. U.S. bond underwriting volume fell by $193.1 billion, or 36 percent, to $336.1 billion while global equity offerings plunged by $30.3 billion, or 21 percent, to $117.2 billion from the first quarter to the second quarter, data compiled by Bloomberg show.

The investment bank contributed $1.38 billion of JPMorgan’s $4.80 billion in net income, or 29 percent. That compares with 74 percent in the first quarter and 54 percent in the second quarter of 2009.

“It’s pretty good that it’s only down a little bit because last quarter was really, really strong for capital markets,” said Matt O’Connor, an analyst with Deutsche Bank AG in New York. “Trading volumes are down across the board while spreads on bonds, the difference between what a bank pays to issue debt and pays investors to buy it, have widened,” he said.

The bank also said it had $550 million in costs related to the U.K. bonus tax.

Bank of America

JPMorgan is the first of the largest U.S. banks to report earnings. Bank of America Corp. and Citigroup Inc., the first- and third-largest U.S. lenders, respectively, may report earnings of $2.6 billion and $1.46 billion when they release results tomorrow, the Bloomberg survey shows.

Paul Miller, a former examiner for the Philadelphia Federal Reserve Bank and analyst at FBR Capital Markets, said he’s watching to see what JPMorgan says about new bank regulations Congress is poised as early as this week to send to President Barack Obama to sign into law.

Dimon has previously estimated that the changes to derivatives regulation alone may cost JPMorgan “$700 million to a couple of billion dollars.”

He said in today’s statement that “many challenges and uncertainties remain which may result in unintended consequences for our clients, the markets and our businesses.”

Problem Loans

Financial companies have recorded losses and writedowns of $1.79 trillion stemming from the U.S. housing crisis and the highest U.S. jobless rate in 26 years, according to data compiled by Bloomberg. The pace of new problem loans eased last quarter as the U.S. economy showed signs of recovery, even as the federal government withdraws support from financial markets.

Federal support for mortgage bonds and reduced interest rates helped JPMorgan, Goldman Sachs Group Inc., Bank of America and Citigroup rack up perfect records in their trading businesses between January and March, when they reported gains for every day in the period. Weaker-than-expected employment, the European debt crisis and reduced underwriting volume dragged down investment-banking revenue in the second quarter.

“What was remarkable about the first quarter is the consistency, that all of the major banks made money every single day,” said Moshe Orenbuch, an analyst at Credit Suisse Group AG in New York. “That was both unusual and not likely to be repeated.”