J.P. Morgan Hit Hard by Credit Crisis

By Tomoeh Murakami Tse and Thomas Heath
Washington Post Staff Writers
Thursday, April 17, 2008

NEW YORK, April 16 -- J.P. Morgan Chase, which previously escaped largely unscathed from severe problems in the mortgage market, reported Wednesday that its first-quarter profit fell by half, showing how credit troubles in subprime home loans are now spreading to other types of consumer and business debt.

Earnings at J.P. Morgan, the country's second-largest commercial bank, were hurt by $2.6 billion in write-downs as the firm restated the value of distressed assets on its books, including subprime and other mortgages, and leveraged loans for corporate takeovers. Profit was also pounded by the bank's decision to set aside $2.5 billion more to cover expected losses on a wide range of loans.

Still, the results came in above the expectations of most analysts. Combined with a not-so-dire earnings report from Wells Fargo and an optimistic growth outlook from chipmaker Intel, the J.P. Morgan earnings inspired investors to hope that the worst of the subprime crisis had passed.

All major stock indicators rose. The Dow Jones industrial average rose 256.80 points, or 2.1 percent, to 12,619.27. The Standard & Poor's 500-stock index rose 30.28, or 2.3 percent, to 1364.71. The Nasdaq composite index gained 64.07, or 2.8 percent, to 2350.11.

"We may have seen the worst headlines in terms of how much money the financials lose a quarter, but there is still tons of trouble ahead," said Michael Tarsala, managing analyst of Thomson Squawk Box. "This isn't going away. I don't see a bottom for the financials."

Merrill Lynch and Citigroup, two firms hit particularly hard by the subprime debacle, are scheduled to report their first-quarter earnings Thursday and Friday, respectively, and both are expected to post losses. Analysts expect Merrill Lynch to write down $6 to $8 billion more in assets, after write-downs of more than $14 billion in the previous quarter. A sizable write-down is also expected at Citigroup, though most analysts do not predict that its loss will top that of the fourth quarter of 2007.

J.P. Morgan's earnings reflected the deteriorating economic conditions that will pressure the bottom lines of U.S. banks for months to come. The $2.5 billion that J.P. Morgan provisioned for expected losses on home-equity loans, credit card debt, auto loans and other debt was more than double what the bank set aside in the previous quarter.

Meanwhile, Wells Fargo, the nation's fifth-largest bank, said it was increasing its credit-loss provision by $2 billion, primarily to account for expected declines in the performance of home-equity loans and loans to small businesses. The San Francisco-based bank said first-quarter profit fell 11 percent, to $2 billion, on revenue of $10.56 billion -- better than Wall Street expected.

The increase in loan-loss provisions is "a reflection of what is taking place in the real economy," said Eric D. Hovde, who runs a District-based hedge fund that trades in bank stocks. "You are seeing massive write-downs in housing-related credit. . . . But you haven't seen meaningful write-down in other areas until this last quarter. So it is going to take six, eight, nine months before you will see banks taking write-down from credit losses in other areas such as commercial real estate and business loans."

Jamie Dimon, J.P. Morgan's chairman and chief executive, said he expected capital markets to remain under stress and the economic environment to continue to be weak.

"These factors have affected, and are likely to continue to negatively impact, our firm's credit losses, overall business volumes and earnings -- possibly through the remainder of the year or longer," he said.

J.P. Morgan said it had a profit of $2.37 billion (68 cents a share) for the first three months of the year on revenue of $16.89 billion. The company had a profit of $4.79 billion ($1.34) in a record first quarter last year. Analysts surveyed by Reuters had estimated profit of 65 cents a share. Earnings were helped by $955 million in after-tax proceeds from the initial public offering of Visa, but losses in other areas overwhelmed the gains.

Among those was a $1.1 billion write-down in leveraged loans, used to finance corporate takeovers by private-equity firms. They had been a lucrative activity for banks until the credit crunch hit last summer. The write-down brought the bank's exposure to leveraged loans to $22.5 billion. It's "still obviously a large risk for us," said Michael J. Cavanagh, J.P. Morgan's chief financial officer.

The bank also has a $95 billion exposure to home-equity loans. It wrote off $447 million in such loans and set aside $1.1 billion for future losses.

Asked during a conference call with analysts if there were signs that losses in home equity were stabilizing, Dimon said: "No. It's exactly what we saw. More houses are going negative equity. . . . Home prices we expect to still go down." Another emerging area of worry was prime mortgages, or loans to home buyers with good credit, where delinquencies rose sharply during the quarter.

"Underlying credit is worse than we thought and probably more widespread than we thought," analyst Jeffery Harte of Sandler O'Neil said in an interview. He was surprised by the write-off for prime mortgages. "There's not many things to like as far as the credit environment right now. . . . The question is how bad is it going to get, and we just don't know that."

J.P. Morgan executives also shed some light on the company's acquisition of Bear Stearns, a major Wall Street investment bank that nearly went bankrupt last month after lenders refused to extend it any more credit. J.P. Morgan said it expects the deal to close by June 30. Hundreds of employees are working on integrating the businesses, said Dimon, who added that jobs will be cut at both Bear Stearns and J.P. Morgan.

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