JPMorgan Net Drops 50%, Matching Analysts' Estimates

JPMorgan Chase & Co., the third- biggest U.S. bank, said the credit-market crisis is almost over after it reported a 50 percent drop in first-quarter profit on $5.1 billion of writedowns and provisions.

JPMorgan rose as much as 5.4 percent in New York trading as the losses from home-equity loans, financing for leveraged buyouts and subprime mortgages were smaller than analysts predicted and revenue exceeded expectations. Net income dropped to $2.37 billion, or 68 cents a share, matching estimates.

In this environment, being able to post earnings as they did is I think all-in good news, Charles Bobrinskoy, vice chairman of Ariel Capital Management LLC in Chicago, which owned more than 611,000 JPMorgan shares as of Dec. 31, said in a Bloomberg Television interview.

JPMorgan, which has posted about $10 billion of writedowns and losses since the beginning of last year, is now grappling with a sagging labor market that has hurt clients' ability to pay credit cards and consumer loans on time. The New York-based company set aside $1.1 billion in the first three months of 2008 for future home-equity loan defaults, after boosting those provisions by $395 million in the fourth quarter.

Chief Executive Officer Jamie Dimon, 52, said on a conference call with reporters that the credit-market crisis is more than halfway finished as financial firms reduce leverage, and may be as much as 80 percent over.

That side is working itself out, Dimon said. That doesn't mean the recession won't get worse or better.

Revenue Declines

Revenue fell 11 percent to $16.9 billion, compared with the average estimate of $16.8 billion among analysts surveyed by Bloomberg. Return on equity, a gauge of how effectively the company reinvests earnings, was 8 percent, compared with 17 percent a year earlier.

Profit declined from $4.79 billion, or $1.34 a share, in the same quarter a year earlier. Earnings matched the average estimate of 15 analysts surveyed by Bloomberg, and beat Thomson Financial's survey by 4 cents a share.

Wells Fargo & Co., the biggest bank on the U.S. West Coast, said first-quarter profit dropped 11 percent to $2 billion, a smaller decline than analysts estimated because the company was able to limit losses from home-price declines in California.

JPMorgan rose $2.16, or 5.2 percent, to $44.28 in composite trading at 12:26 p.m. on the New York Stock Exchange. The shares had fallen almost 16 percent in the past 12 months through yesterday, compared with 57 percent at bigger rival Citigroup Inc. Bank of America Corp., the second-largest U.S. bank by assets, has declined 30 percent.

Investment Banking

The investment-banking division lost $87 million in the first quarter, compared with profit of $1.5 billion in the year- earlier period. Revenue from that business fell by half as JPMorgan marked down $1.1 billion of leveraged loans and $1.2 billion of mortgage-related securities.

Profit from asset management dropped 16 percent to $356 million.

Consumer banking had a loss of $227 million after the bank increased its subprime-related provisions by $417 million. Chief Financial Officer Michael Cavanagh said on the call that the bank expects credit-card charge-offs to gradually rise during the rest of this year.

Dimon said home prices could fall another 7 percent to 9 percent this year, putting pressure on all mortgage-related assets including loans made to people with the best credit.

The banks have a lot of credit losses they're going to have to work through, Ryan Lentell, an analyst at Morningstar Inc. in Chicago, said in a Bloomberg Television interview.

Writedown Estimates

CreditSights Inc. analyst David Hendler estimated in an April 7 research note that JPMorgan's first-quarter losses and provisions would be $7.5 billion, including leveraged loans and mortgages.

Credit-default swaps tied to JPMorgan's bonds fell 6 basis points to 90 basis points, according to broker Phoenix Partners Group. The contracts, used to speculate on corporate creditworthiness or to hedge against losses, decline as investor confidence improves.

U.S. employers cut 80,000 jobs in March -- the most workers in five years -- and the unemployment rate rose to 5.1 percent, the highest since September 2005. The economy also lost jobs in January and February, according to Labor Department figures released April 4.

Consumers fell behind on credit-card, home-equity and auto loans at the fastest pace in 15 years during the fourth quarter of last year, according to a survey by the American Bankers Association released April 3.

Bear Stearns

JPMorgan agreed to acquire New York-based Bear Stearns Cos., once the fifth-biggest U.S. securities firm, on March 16 after lenders and clients fled on concern the company faced a cash shortage. JPMorgan, which got financial support from the Federal Reserve, raised the purchase price from $2 a share to $10 a week later to quell concerns that Bear Stearns shareholders would reject the deal.

Cavanagh said on the conference call with reporters that it's too early to say how many jobs will be lost in the takeover.

The acquisition doesn't preclude JPMorgan from pursuing other deals and the bank is looking at everything, Dimon said.

JPMorgan recently made a bid for Washington Mutual Inc., the largest U.S. savings and loan, according to a person familiar with the talks. Washington Mutual sold $7 billion in shares to an investor group led by private-equity firm TPG Inc. instead of accepting a buyout.