JPMorgan Q3 Earnings Rise 23%; Still Struggling With Mortgages

Bank reports EPS of $1.01, beating expectations, and $4.4 billion in profits

In the finance sector’s first major earnings release for third-quarter 2010, JPMorgan Chase & Co. (JPM) on Wednesday reported earnings per share of $1.01, handily beating analysts’ expectations for EPS of $0.89.

In its Q3 2010 release JPMorgan, which also reported a 23% rise in profits to $4.4 billion versus $3.6 billion in Q3 2009, attributed its strong quarterly earnings performance to solid business results and reduced credit costs.

Revenue dropped 15%, however, to $24.3 billion from $28.8 billion at the same period from a year ago, and Chase’s retail business saw a 19% drop in net income as it struggled to resolve thousands of mortgages with documentation problems.

Dimon Cites Good Underlying Performance but Continuing High Net Charge-Offs

“Our third-quarter net income of $4.4 billion was the result of the good underlying performance of our businesses,” said Chairman and CEO Jamie Dimon in a statement. “We are pleased to report a continued overall decline in credit costs, although our mortgage and credit card portfolios continued to bear very high net charge-offs. Our mortgage delinquency trends remained relatively flat compared with the prior quarter, and we expect mortgage credit losses to remain at these high levels for the next several quarters.”

Dimon warned that if economic conditions worsen, mortgage credit losses could trend higher, but he added that the bank expected credit card net charge-offs to continue to improve next quarter. JPMorgan reduced loan loss reserves by $1.5 billion in Q3 as estimated losses declined.

As for individual business lines, asset management saw net inflows of $38 billion and added over 300 client advisors and brokers. Commercial banking reported record quarterly revenue of $471 million, an increase of $130 million, or 38%, from a year ago, partly due to the purchase of a $3.5 billion loan portfolio. The investment bank’s net income was $1.3 billion, down 33% compared with the prior year and 7% compared with Q2 2010.

On the retail side, however, net income was $848 million, down $195 million versus third-quarter 2009, with mortgage banking and other consumer lending reporting net income of $207 million, a decrease of $205 million, or 50%. Card services’ net income was $735 million compared with a net loss of $700 million in the prior year.

Sandler O’Neil’s Harte: ‘Altogether, I Saw More Positives Than Negatives’

“I thought JPMorgan’s earnings were pretty good versus expectations. It has been such a volatile environment,” said Jeff Harte, a senior bank analyst in Chicago for the New York-based investment bank and broker-dealer Sandler O’Neill + Partners. “Revenues were a little better than we were expecting, which in this environment was a good thing. Credit continues to get better and at a quicker pace, certainly in credit cards.”

The only potential negative for the bank, Harte added, was “all the noise” surrounding the mortgage market. “It has been such a press theme today. It’s more a procedural issue than an underlying document issue.”

While Chase’s task of reviewing 115,000 mortgages is a big job, the bank also has talked about how mortgage-related losses are starting to flat-line, Harte noted.

“They won’t get worse, but maybe they won’t continue to get better,” he said. “The combination of those things probably had people worried a bit about the domestic mortgage market. But altogether, I saw more positives than negatives. Some of the market reaction today to mortgage foreclosure issues is looking too much at the draconian case.”

Read about JPMorgan’s Q2 2010 earningsat AdvisorOne.com.

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