JPM's Retail Gains Fail to Overcome Investment Banking Setbacks

JPMorgan Chase & Co.'s third-quarter profits fell as a slowdown on Wall Street undercut lending and deposit gains in the New York company's rapidly expanding retail bank.

Earnings fell from the prior quarter in all but one of its seven business units — retail banking, where profits more than tripled to $1.16 billion on higher mortgage and debit card fees as well as a large decrease in noninterest expenses.

As expected, investment banking profits fell from the prior quarter as investors and corporations shied away from risk after Europe's debt problems deepened and U.S. lawmakers haggled over the nation's debt limit.

Jamie Dimon, chairman and chief executive of the $2.3 trillion-asset bank, said in a conference call with reporters on Thursday that the performance of the investment bank was "pretty good," given the state of the economy.

"It's a volatile business," Dimon said. "I personally don't understand why anyone is surprised by the volatility of investment banking. It has been and it will be."

The company's total profit of $4.3 billion fell 22% from the prior quarter and 4% from a year earlier. Revenue dropped 11% quarter to quarter, and rose slightly from a year ago, to $24.37 billion. Non-interest expenses were $15.5 billion, down 8% from the trailing quarter and up 8% from last year.

JPMorgan Chase is viewed as a bellwether for other banks because it is the first large lender to report earnings and is generally considered the strongest player in the industry.

Dimon's high profile can make him a target for critics; he was among a handful of New York financiers that Occupy Wall Street demonstrated against on Wednesday. They marched outside his home in New York. Dimon said he was not offended.

"It's legal to demonstrate," he said. If "it's peaceful ...it's fine."

"You should try and listen and not have a knee-jerk reaction" when people demonstrate, he added.

He then asked reporters to write that JPMorgan Chase is "trying to do our share" to reboot the economy.

"We've handed out 13,000 net new jobs in the United States in the last 12 months," Dimon said.

Many of those jobs were added in its nearly 5,400-branch retail bank, which the company has been building aggressively as rivals Wells Fargo & Co. and Bank of America Corp. are closing stores.

It added about 6,000 retail workers in the quarter and 56 branches. Its retail bank now has just under 5,400 branches and 129,000 workers.

Its third-quarter numbers indicate that its double-down on retail banking is beginning to pay off, with the unit reporting higher lending and deposit fees. Deposits of $382 billion were up 1% from the prior quarter and 6% from a year earlier. Mortgage income surged as people took advantage of low rates to refinance their homes. It was up $280 million, or 25% from the prior quarter and 96% from a year ago, to $1.4 billion.

The sharpest decline among business units was in credit cards and automotive services, where profits fell 24% from a year earlier and 8% from the prior year, to $849 million. Income was soft in that unit while non-compensation expenses were up.

Its housing headaches continued. It set aside another $1 billion to cover mortgage-related lawsuits. That was slightly less than the $1.3 billion mortgage-litigation charge it booked last quarter.

"The one area of caution for us remains home lending," JPMorgan Chase Chief Financial Officer Doug Braunstein said in the call.

"It was a generally positive credit story. Wholesale credit trends remain stable and positive. On the consumer side we got the improvement we expected in cards," Braunstein added."Our loan loss reserve balances remained unchanged for the quarter."

Another big loss was in private equity, where the company lost $347 million, in part from writedowns of private investments and declines in the fair value of public securities.

Investment banking fees of $1.04 billion were down about 46% from the prior quarter and 31% from a year ago. A 28% decline in compensation costs were not enough to offset weak trading and advisory activity: the investment bank — JPMorgan Chase's biggest moneymaker throughout the downturn — reported a total $1.6 billion in profit, down 20% from the prior quarter but up 27% from a year earlier.

A key offset of the investment bank's soft numbers: a $1.9 billion gain from marking up the value of certain derivatives on the company's widening credit spreads.

It took advantage of its falling share price to repurchase $4.4 billion of stock and warrants in the quarter.

"We have a tremendous amount of capital and when we do things like that we're looking forward multiple years," Dimon said.

The company had authorization from regulators to repurchase about $8 billion of its shares and it determined to buy back about half of that, he added.

Like other banks, JPMorgan Chase is reducing expenses to offset higher regulatory costs and the anemic loan income stemming from tepid demand and low rates.

The company expects reforms under the Durbin amendment that took effect in the quarter to reduce revenue by about $600 million in 2011.

While it has no formal cost-cutting initiative, it will be "looking at products and services" over next six to nine months to determine where it can trim costs, exit certain areas and raise prices to offset that revenue hit, Dimon said.

It now expects to rein in its branch growth, too. It no longer intends to build more than 250 branches this year as closures of weak offices offset new construction in places like California and Florida, Dimon said.

Braunstein told analysts that given current conditions "it's not unreasonable to expect that the fourth quarter will look like the third quarter" in the investment bank.

It has no "major layoff programs" planned for its markets unit, though it  will continue letting go of markets sales staff through next year as technology upgrades eliminate the need for as many people, Dimon said.