JPMorgan Beats Estimates Due to Accounting

By Dawn Kopecki - Oct 13, 2011 7:59 PM GMT+0700

JPMorgan Chase & Co. (JPM), the second- largest U.S. bank, reported an approximately 33 percent profit decline excluding a $1.9 billion accounting benefit as earnings from investment banking and trading slumped.

Third-quarter earnings fell to about $3.1 billion, or 73 cents a share, not including the 29-cent accounting gain, from $4.71 billion on the same basis a year earlier. Net income was $4.26 billion, or $1.02 a share, compared with the average per- share estimate for adjusted earnings of 92 cents in a survey of 30 analysts by Bloomberg, the New York-based company said today.

Revenue at the investment-banking unit fell 13 percent from the second quarter as concern that Greece would default and U.S. lawmakers would fail to raise the debt ceiling roiled markets. The firm said the division will face similar market conditions for the rest of the year. The retail business fared better, with mortgage fees and related income gaining 25 percent from the second quarter and credit-card revenue up 7 percent.

The debt-valuation gain, “does not relate to the underlying operations of the company,” Chief Executive Officer Jamie Dimon, 55, said in a statement. Dimon said on a conference call with journalists that the after-tax effect of the accounting change was about 60 percent of the total gain for the quarter.

Matthew Burnell, an analyst at Wells Fargo & Co. (WFC), estimated the firm would post $350 million in gains from the change in debt valuation. U.S. accounting rules require the adjustment when the value of a company’s debt declines, under the theory that a profit would be realized if it were bought back at a discount.

Share Performance

JPMorgan fell to $32.61 in New York trading from $33.20 on the New York Stock Exchange yesterday. The shares are down 22 percent this year.

Third-quarter revenue fell 0.2 percent to $23.8 billion from a year earlier. Fixed-income and equity-markets revenue rose to $4.75 billion from $4.3 billion.

JPMorgan and other large banks, which have benefited from record low costs of funding mortgages and other assets, face a squeeze on net interest margins -- the difference between what they pay to borrow money and what they get for loans and on securities.

Jes Staley, CEO of JPMorgan’s investment bank, braced investors last month for the drop in trading revenue from the second quarter, when the company generated $5.5 billion from that business. The investment bank’s staff dropped to 26,615 in the third quarter from 27,716 in the second quarter, a decline of 4 percent.

‘Challenged’ Trading

“Trading overall in the third quarter is going to be challenged amid dislocations both home and abroad,” Jason Goldberg, a senior bank analyst at Barclays Capital in New York, said in an interview yesterday. “During the quarter, you saw both a slowdown in investment-banking activity and more challenging trading conditions amid a spike in volatility fueled by concerns in Europe.”

Slowing economic growth and heightened concern about European sovereign debt have weighed on bank stocks all year. The KBW Bank Index (BKX) dropped 25 percent this year through yesterday, and the worst performer, Bank of America Corp. (BAC), is down 51 percent. A jump in borrowing costs at some banks, including New York-based Morgan Stanley, subsided last week as investors became more optimistic that European Union policy will find a solution.

Real Estate

Home sales remain slow. Purchases of new houses fell in August to a six-month low, according to Commerce Department data released Sept. 26. Purchases of previously owned homes rose to a five-month high, boosted by demand of low-priced, distressed houses, the National Association of Realtors said Sept. 21. Sales of existing properties have averaged a 4.97 million annual pace this year, compared with the 7.25 million peak reached in September 2005.

Fed policy makers last month announced more steps to spur growth and revive the residential real-estate industry, which since 1982 has aided every economic recovery except the current one. In a move aimed at lowering borrowing costs, the Fed said it will buy $400 billion of bonds with maturities of six to 30 years through June, while selling an equal amount of debt maturing in three years or less.

Loan growth in the U.S. remains stagnant and net interest margins, which measure the profit margin on lending, continue to decline. Bank loans and leases fell $2.1 billion to $6.829 trillion from August 2010 through Sept. 28, according to Federal Reserve data.

JPMorgan was the first of the major U.S. lenders to report third-quarter results.

New York-based Citigroup Inc. (C), the third-biggest U.S. bank, may report a profit of $2.49 billion when it releases results on Oct. 17, and Wells Fargo & Co., based in San Francisco, will probably say it earned $3.87 billion when it announces results the same day, the survey of analysts shows. Bank of America may report a profit of $2.73 billion on Oct. 18 while Goldman Sachs Group Inc. (GS) may say it earned $45.3 million.

To contact the reporter on this story: Dawn Kopecki in New York at dkopecki@bloomberg.com.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net