JPMorgan earns $4.8 billion in 2nd quarter, reduces loan loss reserves

JPMorgan earns $4.8 billion in 2nd quarter

NEW YORK — JPMorgan Chase & Co. said Thursday its second-quarter net income soared 77 percent to $4.8 billion as a slowdown in losses from failed loans helped offset a difficult spring in trading and investment banking.

The strong results offered hope that loan losses at the nation’s big banks may have peaked in the first half of 2010, a critical step before banks can become stronger and boost lending to consumers and small businesses.

JPMorgan Chase, the first of the big banks to report earnings for the April-June period, easily surpassed analysts’ expectations as it earned $1.09 a share, up 28 cents a share from a year earlier. Analysts had forecast a profit of 67 cents per share in the just-ended quarter. Net revenue, however, fell nearly 8 percent from a year ago to $25.6 billion.

JPMorgan Chase has been one of the strongest banks as it weathered the financial crisis and recession, so its performance shouldn’t necessarily be taken as a sign of how well other banks did during the quarter. Many financial companies don’t have such big investment banking operations, which includes trading of stocks and bonds. That has allowed JPMorgan, the nation’s largest bank by assets, to make up for losses in its consumer lending division.

Yet it was a sharp drop in loan losses, not an increase in trading profits, that helped JPMorgan the most in the last quarter. The bank set aside $3.36 billion to cover bad loans, down 65 percent from a year ago and 52 percent from the first quarter. The improvements mean the bank is seeing fewer delinquencies in its lending business, though JPMorgan Chief Executive Jamie Dimon said loan losses overall “remain at extremely high levels.”

“It is too early to say how much improvement we will see from here,” Dimon said of declining loan losses. Bankers have been cautious throughout the aftermath of the 2008 financial crisis when reporting progess in their loan businesses. Economists and investors are looking to those loan loss levels as an indicator of how well the economic recovery is faring.

Dimon also warned of possible “unintended consequences” to the bank’s business from the financial regulatory overhaul awaiting congressional approval. The new rules would require banks to hold more capital and would restrict their trading of risky but lucrative securities like derivatives.

Notably, Dimon was less upbeat about the future than he was when announcing first-quarter results. At that time, the CEO said the economy was showing “clear and broad-based improvements” that should result in a “strong recovery.”

A more cautious Dimon on Thursday called improvements in the bank’s mortgage lending unit encouraging but he stopped short of predicting a return to pre-financial crisis conditions.

“Obviously, we hope it improves,” Dimon said.

In the second quarter, a big drop in the stock market hurt JPMorgan’s investment banking unit. Revenue fell 6 percent from a year ago to $1.4 billion as the bank earned smaller fees on financing for stock and bond offerings and advising on corporate dealmaking.

The Standard & Poor’s 500 index, considered the best measure of how stocks have fared, fell 11.9 percent from April through June, its worst showing since the financial crisis devastated stocks in the fourth quarter of 2008. All the banks with big trading operations are expected to report a drop in their income from those businesses.

But a drop in loan losses helped the bank make up for the slowdown in investment banking. Revenue in the consumer lending unit jumped 10 percent from a year ago to $2 billion as the bank saw fewer loan losses across its major consumer businesses including mortgages, credit cards and student loans. However, JPMorgan Chase did report an increase in losses from commercial real estate loans, which have lagged consumer mortgages as they’ve gone into default.

Still, JPMorgan’s drop in loan loss reserving is encouraging. The banking industry has struggled over the past two years to work through billions in bad loans made before the financial crisis. Until that happens, banks’ capital will remain constrained and they won’t be able to open the credit spigot and help grow the economy.

Analysts believe loan losses likely peaked in the first six months of the year. But it’s unlikely that other big banks were able to slash their reserves during the past quarter as dramatically as JPMorgan, said Jeff LaFrance, banking analyst at Gradient Analytics.

“JPMorgan is a special case in how they prepare for loan losses,” LaFrance said. “They’ve been extremely conservative, so we wouldn’t expect these kind of numbers from the other banks.”

Investors initially bought on the results but later eased sold JPMorgan along with many other stocks in response to more bad economic news. The stock fell 36 cents, or 0.9 percent, to $40.71.

The lukewarm reaction may also reflect the uncertainty facing JPMorgan and other banks, including how the regulatory overhaul will affect profits and whether the economy continues to recover or falls back into recession.

Most analysts say the new banking rules on everything from capital levels to credit cards and trading of risky securities won’t dramatically affect revenue as some in the industry had feared. But they caution that it could take years before the full impact of the legislation is known.

Speaking to analysts, Dimon said the bank can work within the new rules but declined to quantify the potential impact to its business.

“We want to make sure we can service our clients (under the new rules), and we think we’ll be able to,” Dimon said. “Will it have some affect on revenue and margins? Yeah, probably.”