JPMorgan Chase Earnings Up Sixfold

October 15, 2009 Updated: October 15, 2009

NEW YORK—More than a year after the financial industry meltdown, banking giants have returned to posting large profits, but consumer credit concerns over mortgage and credit card payments still plague the sector.

JPMorgan Chase & Co. on Wednesday said that the bank earned profits of $3.6 billion in the third quarter, more than six times the amount of profit from the same period last year. The quarterly earnings and earnings per share of 82 cents both beat analysts’ expectations.

The company is the first of the large U.S. banks to report third quarter results. The news sent shares of other banks soaring on Wednesday and fanned hopes that more good news is to come from others in the industry. Citigroup Inc., Bank of America Corp., and Goldman Sachs Group Inc. will all report results later this week.

The results were largely driven by higher investment banking revenues, such as underwriting and trading of corporate bonds, as the debt market experienced more activity during the quarter.

Risks Lie Ahead

However, consumer credit woes continue to plague large U.S. banks as Americans grapple with job losses and mounting bill payments. As a result, JPMorgan significantly increased its cash reserves to cover expected nonpayments from mortgage and credit card holders.

“Credit costs remain high and are expected to stay elevated for the foreseeable future in the consumer lending and card services loan portfolios,” said CEO Jamie Dimon in a statement. “Accordingly, we have added $2 billion to our consumer credit reserves, bringing the firm-wide total to $31.5 billion, or 5.3 percent of total loans.”

In total, the bank has set aside around $4 billion to cover losses from defaulting home loans, and around $5 billion to cover expected losses from credit card nonpayments.

The bank expressed views that business as a whole is experiencing “broad based” improvements, and it sees the financial situation of consumers stabilizing.

But the optimism was tempered. Most economists predict that the U.S. unemployment rate would hit 10 percent in the near future, further hampering consumers’ ability to pay off bills. “While we are seeing some initial signs of consumer credit stability, we are not yet certain that this trend will continue,” Dimon warned.

JPMorgan has been one of the strongest banks during the recession, and some analysts credit the health to Dimon’s level-headed management style, charisma, and decision making. But future risks remain for the banking giant, as the CEO must strike a balance between appeasing Washington politicians and his bankers regarding salaries and bonuses in light of improving financial results.

In addition, recent credit card regulation aiming to provide more rights to consumers will hamper the bank’s profits from its credit card business. Default levels among commercial mortgages are also expected to increase.

Stable Outlook

Shares of JPMorgan Chase jumped $1.50, or 3 percent in Wednesday trading. Since Jan. 1, shares have risen close to 50 percent.

“We anticipate continued synergies from the company’s diversification and strong capital position, but increasing provisions and worsening credit quality will be a drag on upcoming results,” Zacks Investment Research said in a note on Wednesday. The firm maintained its “neutral” rating on JPMorgan Chase’s stock.