JPMorgan bests forecasts but sees US credit worsen
Thursday, July 17, 2008; 5:36 PM
NEW YORK -- The banking sector looked a little brighter for a second straight day Thursday after JPMorgan Chase & Co. reported better-than-expected results despite a spike in mortgage and other loan defaults.
The bank's shares gained more than 13 percent Thursday after it reported a 53 percent drop in profit. Following Wells Fargo & Co.'s stronger-than-expected results released Wednesday, investors appear more confident that the banking sector, while struggling, will be propped up by some of its healthier players.
However, JPMorgan Chase, like its weaker competitors, still has a tough environment to slog through as the aftermath of the mortgage and credit crisis continues. Even the bank's more creditworthy borrowers are now failing to make their mortgage payments _ the charge-off rate for prime mortgages, which include more than $34 billion in jumbo mortgages and $2.5 billion in alt-A mortgages, nearly doubled from the first quarter to the second, from 0.48 percent to 0.91 percent.
"They're staggering numbers. We have all the politicians telling people it's OK not to pay your mortgages," said JPMorgan Chase Chief Executive Jamie Dimon during a call with analysts. He said it's hard to predict how the prime mortgage trends will progress throughout the rest of 2008, but "our current expectation is those losses could triple from here."
Jumbo mortgages are loans that exceed the maximum set by government entities Fannie Mae and Freddie Mac, and alt-A mortgages are given to people with minor credit problems or who lack proper documentation to get a traditional prime loan.
The main culprit is home prices, which are still tumbling.
"Even if it's a prime mortgage, it could still be under water _ even if they can afford to pay, people might be likely to walk," said Celent analyst Bart Narter.
JPMorgan Chase earned $2 billion, or 54 cents per share, in the April to June period, down from $4.23 billion, or $1.20 per share, in the same time frame last year. Revenue slipped 3 percent to $18.4 billion. Analysts surveyed by Thomson Financial had predicted, on average, a profit of 44 cents share on $16.6 billion in revenue.
JPMorgan took a provision for credit losses of nearly $3.5 billion, or $4.3 billion when the effect of securitized credit cards _ which are off the bank's balance sheet _ are included.
The bank also lost more than half a billion dollars due to Bear Stearns Cos., the ailing investment bank it bought in March with the help of the government. JPMorgan marked down the value of its investment bank holdings by $1.1 billion, and bulked up its reserves by $1.3 billion. The bank's total allowance for future loan losses now stands at $13.9 billion.
Dimon said he expects the economic environment to weaken and for the capital markets to remain strained, and that these risks will affect the business for the rest of the year or longer.
Credit card defaults could pose a big problem for the bank going forward. During the second quarter, JPMorgan charged off nearly 5 percent of its $153 billion outstanding in credit cards _ that's about $7.6 billion.