Q2 Earnings: JPMorgan Earns $5.4 Billion in Profits Despite Lingering Mortgage Issues

Asset management income is down $27 million, largely due to 28% increase in headcount and pay

JPMorgan Chase (JPM) led second-quarter 2011 earnings season on Thursday with a relatively strong performance for the banking sector, reporting a 13% rise in profits versus a year ago at this time. Profits stood at $5.4 billion, or $1.27 per share, on revenue of $27.4 billion, up 7% over the prior year.

Last quarter, JPMorgan reported a striking 67% rise in profits, with earnings at $5.56 billion, or $1.28 per share. This quarter, analysts had expected JPM earnings of only $1.21 per share, and the bank certainly bested those expectations.

However, the bank continues to grapple with problems in its home lending unit, resulting in its addition of $1.3 billion to litigation reserves to aid in resolving mortgage issues, according to JPMorgan’s Q2 2011 earnings release. Also, the bank’s retail financial services set aside a $1.1 billion provision for credit losses, down $587 million from a year ago, yet offsetting the retail bank’s net income of $1.1 billion, up 21% compared with the prior year.

To be sure, JPMorgan’s investment bank lent a hand to the quarter’s profitable performance, with net income of $2.06 billion, up 49% from a year ago, though down from first-quarter 2011’s profits of $2.37 billion.

jamie dimon“Our second-quarter earnings reflected solid performance across most of our businesses. The investment bank delivered strong earnings across most products and maintained its No. 1 ranking in Global Investment Banking Fees,” said Chairman and CEO Jamie Dimon (left) in a statement. “Commercial Banking reported record revenue and continued loan growth for the quarter. Retail Financial Services demonstrated good underlying performance in Retail Banking but continued to experience high losses for mortgage-related issues.”

For such a large organization, JPMorgan is a “very nimble” and well-managed institution, said Bonnie Baha, head of corporate bond investments for DoubleLine Core Fixed Income Fund (DBLFX). “They really are back on track. They haven’t suffered as much as Citi or Bank of America, but they have a remarkable ability to apply damage control.”

In JPMorgan’s asset management division, net income was $439 million, down $27 million, or 6%, from the prior quarter, but 12% higher than net income of $391 million a year ago. The results reflected higher net revenue, largely offset by higher noninterest expense.

Noninterest expense was $1.8 billion, an increase of $389 million, or 28%, from the prior year, largely resulting from an increase in headcount and higher performance-based compensation.

Asset management net revenue was $2.5 billion, an increase of $469 million, or 23%, from the prior year. Noninterest revenue was $2.1 billion, up by $440 million, or 26%, due to the effect of higher market levels, net inflows to products with higher margins, higher valuations of seed capital investments and higher performance fees. Net interest income was $398 million, up by $29 million, or 8%, due to higher deposit and loan balances, partially offset by narrower deposit spreads.

Revenue from Private Banking was $1.3 billion, up 12% from the prior year. Revenue from Institutional was $704 million, up 55%. Revenue from Retail was $544 million, up 18%.

Assets under supervision were $1.9 trillion, an increase of $284 billion, or 17%, from the prior year. Assets under management were $1.3 trillion, an increase of $181 billion, or 16%. Both increases were due to the effect of higher market levels and net inflows to long-term products, partially offset by net outflows from liquidity products. Custody, brokerage, administration and deposit balances were $582 billion, up by $103 billion, or 22%, due to the effect of higher market levels and custody and brokerage inflows.

The provision for credit losses was $12 million, compared with $5 million in the prior year.

Read about JPMorgan’s Q1 2011 earnings at AdvisorOne.com.

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