JPMorgan Earnings 1Q 2010: Bank's Earnings Rise 57 Percent On Huge Trading Gains

06/14/2010 05:12 am ET | Updated May 25, 2011

NEW YORK — JPMorgan Chase & Co. reported a $3.3 billion first-quarter profit on big gains in the financial markets even as the Obama administration pressed for limits on banks' trading of risky but lucrative investments.

The company's earnings report Wednesday also had some good news on the economy: The bank is seeing the clearest signs yet of recovery. The dollar amount of its loans in or near default fell during the quarter from the final three months of 2009.

JPMorgan Chase, the first of the big banks to report earnings for the January-March period, easily beat expectations as its earnings rose 57 pecent from $2.1 billion a year earlier. The company again added to its reserves for failed loans during the quarter, but its investment banking division and other businesses enabled it to more than overcome the ongoing weakness in lending.

JPMorgan Chase has been one of the strongest banks as it weathered the financial crisis and recession, so its performance shouldn't 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 and allowed JPMorgan, the nation's largest bank by assets, to overcome its loan losses.

Yet JPMorgan's reliance on trading of risky assets is also problematic. The Obama administration and Congress are seeking to revive Depression-era limits on commercial banks' trading activities as part of a broader reform of the financial system following the near-collapse of the banking system in 2008.

The proposed reforms, which President Barack Obama discussed with legislators Wednesday, would restrict commercial banks from trading on their own accounts, what's known as proprietary trading. The rules would also limit banks' ability to trade complex financial products known as derivatives. Derivatives are used to hedge risk or speculate on the future value of assets. They were also widely blamed for helping trigger the financial meltdown.

During a conference call with analysts, CEO Jamie Dimon said his bank made "very little" from proprietary trading but declined to give specifics. Regarding the proposed crackdown on derivatives, he estimated it could reduce trading revenue anywhere from "several hundred million to a couple billion dollars" depending upon the details.

"It will be a negative," Dimon said of the proposed legislation.

Banking analyst Nancy Bush of NAB Research said JPMorgan's strong results despite ongoing consumer loan losses raise questions about how banks will make money if they're restricted from trading in financial markets.

"What this shows is that Jamie's universal bank model is working at a time when Washington wants to take it apart," Bush said.

Given the uncertainty, other analysts questioned how long JPMorgan's trading winning streak can last.

"We believe the blockbuster trading results could prove unsustainable," CreditSights analyst David Hendler said in research note, citing the potential for higher interest rates and pending regulatory legislation.

Dimon offered a more upbeat assessment on the future than he has in the past, saying the economy still faces challenges but is showing "clear and broad-based improvements."

"We believe these improvements will continue and are hopeful they will gather momentum, resulting in a strong recovery," he said.

JPMorgan Chase said its nonperforming loans, those that are in default or close to being in default, totaled $2.7 billion, up $946 million from a year earlier but a $763 million improvement from the final three months of 2009.

"We continued to see delinquencies stabilize, and in some cases improve, in our credit portfolios," Dimon said. "Ultimately, the health of these portfolios will track the health of the economy."

JPMorgan earned 74 cents per share, easily topping analysts' expectations of 64 cents. Total revenue rose 5 percent to $28.2 billion for the quarter, surpassing forecasts.

Investors were pleased with the report. They bid JPMorgan Chase stock up 4.23 percent to $47.81 in afternoon trading and also sent other financial stocks higher.

Investment banking, especially bond trading, generated the bulk of JPMorgan's profits. The bank said that division earned $2.5 billion, up 50 percent from a year earlier.

While credit losses continued to weigh on the bank's performance, they were less of a drag than in the past. JPMorgan set aside $7 billion for loan losses in the quarter, down 30 percent from a year ago.

JPMorgan said it lost $1.3 billion on its real estate portfolios, slightly more than the $1.1 billion it lost the previous year. Signaling that it expects further credit weakness, the bank set aside $3.3 billion for real estate loan losses, up from $3.1 billion a year earlier.

The bank's losses in its credit card business fell to $303 million, while provision for future credit card losses also dropped to $3.5 billion.

JPMorgan has performed better than other large competitors in part because of its relatively light exposure to troubled subprime mortgages and commercial real estate. It was also among the first banks to repay government bailout money. JPMorgan last year paid back all of the $25 billion it had received at the height of the credit crisis in 2008.

Its relatively stronger foundation than its competitors, which report results in the coming days, helped set JPMorgan up for a quarter that is likely to be among the best in the industry, according to analyst estimates. Bank of America Corp. is scheduled to report earnings on Friday, followed by Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley the following week.