Q3 Earnings Kickoff: JPMorgan Profit Drops 4%

Bank’s EPS of $1.02 beats year-ago quarter’s $1.01 despite global market turmoil and mortgage woes

JPMorgan Chase & Co. (JPM) on Thursday kicked off the finance sector’s first major earnings release for the third-quarter with an anticipated drop in profit, down 4% to $4.26 billion from $4.42 billion a year ago.

Earnings per share were higher than in Q3 2010, however, at $1.02 versus EPS of $1.01 last year. This quarter's EPS beat analysts’ consensus estimate of $0.96.

Disappointing investment banking results, global capital market challenges and continuing mortgage loan problems all contributed to the bank’s losses, according to JPMorgan’s Q3 2011 release.

Earnings were boosted by several significant and unusual items. These included a $542 million loss in Private Equity, $1 billion of litigation expenses and a $1.9 billion pretax debt-valuation adjustment (DVA) gain that allows banks to book profits when the value of their bonds falls from par—an accounting gain created when traders bet against JPMorgan’s bonds.

JPMorgan Chase CEO Jamie Dimon“All things considered, we believe the firm’s returns were reasonable given the current environment,” said JPMorgan Chairman and Chief Executive Jamie Dimon (left) in a statement. “The Investment Bank’s revenue, excluding the DVA gain, was down substantially; however, we are gratified that the business maintained its No. 1 ranking in global investment banking fees, and we believe that we have maintained a healthy share of the global sales and trading market.”

JPMorgan’s quarterly earnings reports are closely watched by the markets because they are the first releases among big banks and reflect how the rest of the Finance sector will fare.

Big bank shares were down in early afternoon trading on the Dow. JPM shares dropped 6%. Bank of America Corp. (BAC) shares were the most active by volume, falling 5.6%. Citigroup (C) shares fell 1,76%.

The asset management units profits were $385 million, a decrease of $35 million, or 8%, from the year-ago quarter’s $420 million. Second-quarter 2011 profits in the unit totaled $439 million.

Revenue from Private Banking was $1.3 billion, up 10% from the prior year. Revenue from Retail was $563 million, up 16%. Revenue from Institutional was $455 million, down 10%. Assets under supervision were $1.8 trillion, an increase of $36 billion, or 2%, from the prior year. Assets under management were $1.3 trillion, a decrease of $3 billion.

“This decrease was due to net outflows from liquidity products and the effect of lower market levels, offset by net inflows to long-term products,” according to the JPMorgan release.

As for mortgages, net charge-offs improved slightly but remained at extremely high levels.

“We expect mortgage credit losses to remain elevated,” Dimon said. “The firm remains committed to helping homeowners and preventing foreclosures.”

The Chase credit card portfolio’s net charge-off rate improved to 4.34% and “may continue to improve modestly over the next quarter or so,” Dimon said. “After that we currently would not expect much improvement.”

Regarding the balance sheet, Dimon said JPMorgan continues to maintain its fortress balance sheet, ending the third quarter with a Basel I Tier 1 Common ratio of 9.9%. “Our strong capital position allowed us to repurchase $4.4 billion of common stock during the third quarter,” he said.

Read about JPMorgan’s Q2 2011 earnings at AdvisorOne.com.

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