NEW YORK — JPMorgan Chase & Co.'s $3.28 billion profit report carried a sobering message: Consumers are still struggling to pay off their loans, posing a threat to a strong economic recovery.
Even as the bank reported Friday its earnings more than quadrupled from $702 million during the final three months of 2009, JPMorgan said it's not finished setting aside money to cover failed loans. In other words, it expects many more consumers to default to default on mortgages and other loans.
JPMorgan is the first of the big banks to announced fourth-quarter earnings. Its profits came from investment banking and asset management, businesses that have boomed as Wall Street remains far ahead of Main Street. And analysts expect other banks to show similar results.
JPMorgan said it's uncertain about the timing of a possible rebound, repeating a warning it has now issued for several quarters. CEO Jamie Dimon was blunt during a conference call with analysts, saying, "We don't know when the recovery is."
The news rattled investors who have been betting on more signs of recovery, especially among consumers. The stock market tumbled, taking the Dow Jones industrials down 100 points. JPMorgan fell 2 percent.
There's "a lot of fog as to when business will return to normal," said Alan Gayle, senior investment strategist for RidgeWorth Investments.
JPMorgan's biggest trouble spots were in consumer banking and credit card lending. The bank's retail financial services division, which includes its mortgage operations, lost $399 million. That was worse than the final quarter in 2008, when credit markets had essentially shut down because of the collapse of banks including Lehman Brothers.
The company reported increases in mortgages that were charged off, or classified as uncollectible, including prime mortgages, the highest quality home loans. It also reported an increase in home equity loan charge-offs.
During the quarter, employers cut hundreds of thousands of jobs and the unemployment rate passed 10 percent. Many economists expect loan defaults and home foreclosures to continue at a high rate as long as consumers keep losing their jobs.
"Clearly the housing market is still finding a footing," Gayle said, adding that foreclosures could rise further as rates on adjustable-rate mortgage move higher and home prices continue to fall. High unemployment adds just another layer of uncertainty about how long it will be before mortgage default rates start to drop, he said.
The credit-card lending division lost $306 million during the final three months of 2009. Results would've been worse had the bank not had a payment holiday in the period.
"It's behaving as we expected, which is comforting news, but it's still going higher," Mike Cavanagh, the bank's chief financial officer, said during a call with the media about the credit-card portfolio. During the analyst call, Cavanagh said losses could approach 10.5 percent by the middle of 2010, up from 8.64 percent in the fourth quarter. Credit-card losses historically have mirrored the unemployment rate, which was 10 percent last month.
To handle the mounting loan losses, JPMorgan's provision for credit losses totaled $7.28 billion during the fourth quarter.
Cavanagh said the bank is not able to say "we've hit a peak in reserving" funds to cover those losses.
Big national banks reporting next week, including Citigroup Inc., Wells Fargo & Co. and Bank of America Corp., are likely to report similar problems.
"JPMorgan is the leader in the industry," said Len Blum, a managing partner at investment bank Westwood Capital. "Any weakness they experience, expect it worse elsewhere."
As it earned billions of dollars, JPMorgan increased its pay packages for its workers, even as furor over banking bonuses has grown. The average compensation per employee rose to $121,124 in 2009 from $101,110 a year earlier. The average compensation in the investment banking division was about $380,000.
Big banks have faced outrage from politicians who are upset with the lavish pay for companies that helped push the country into recession and received billions in bailout funds. JPMorgan received $25 billion in bailout money in the fall of 2008 at the peak of the credit crisis. It paid back that money in the middle of 2009 when it was first able to do so.
JPMorgan earned 74 cents per share, easily surpassing analysts' average forecast of 61 cents, according to Thomson Reuters. Its results compared with earnings of 6 cents per share, a year earlier.
Despite the ongoing problems with consumer banking, JPMorgan is still performing well because of its robust investment banking unit. As long as stock and bond markets continue to improve, the bank will be able to churn out profits and reward its employees handsomely.
JPMorgan's investment bank earned $1.9 billion during the fourth quarter, while its asset management division generated $424 million in net income.
Fees from financing debt and stock offerings continued to surge in the fourth quarter. Debt financing fees jumped 58 percent to $732 million from the same quarter a year earlier, while stock financing fees climbed 66 percent to $549 million.
For the full year, JPMorgan earned $11.7 billion, or $2.26 per share on record managed revenue of $108.6 billion. The bank earned $5.6 billion, or $1.35 per share in 2008.