JPMorgan's income drop casts a pall over banks

AP News

10/13/2011 6:14:46 PM - AP News

If JPMorgan Chase can't do well, investors worry that other banks may do even worse.

The New York bank, widely considered the strongest in the industry, reported a 4 percent drop in income last quarter Thursday on weakness in investment banking and more costs related to litigation over mortgage investments.

That bodes poorly for the other big banks _ Citigroup Inc., Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley _ that are set to report results next week. JPMorgan warned that continued uncertainty in global markets could hurt fourth quarter results too. Its stock slumped, dragging down other large banks with it.

"It's hard not to be cautious. I'd say that right now nobody, nobody knows what's going to happen tomorrow," Jamie Dimon, CEO of JPMorgan Chase, said in a conference call with analysts to discuss the bank's earnings report.

The New York bank's third quarter net income dropped 4 percent to $4.26 billion, or $1.02 per share, on revenue of $24.37 billion.

The declines in investment banking results were caused by extreme volatility in stock and bond markets in the third quarter. Markets started to swing wildly in August after the U.S. government's credit rating was downgraded and worries emerged that a default by Greece could hobble the European banking system. Investors have also worried that the U.S. might slip into another recession.

The huge swings led to a slowdown in debt issuance and a record backlog in IPOs, both sources of banking fees, as companies elected to wait out the turmoil and investors pulled money out of stocks and bonds.

JPMorgan Chase & Co.'s fees from investment banking fell 31 percent to $1 billion in the quarter. Debt underwriting fees fell 37 percent to $496 million as fewer companies raised money by selling debt. With many IPOs also shelved, stock underwriting fees fell 47 percent.

The market turmoil also cut the value of JPMorgan's investments. Its private equity business lost $347 million.

JPMorgan's stock fell 4.8 percent to close at $31.60 Thursday. Bank of America's declined 5.5 percent to $6.22, Citigroup's was off 5.3 percent to $27.64, Morgan Stanley lost 4.4 percent to $15.14 and Goldman Sachs fell 3 percent to $96.15.

After JPMorgan reported the large decline in fees from market-related businesses, at least one analyst suggested investors buy the stocks of regional banks that have less exposure to investment banking. Fred Cannon, analyst of Keefe, Bruyette & Woods, recommended Comerica Inc., US Bancorp, or Zions Bancorp.

Cannon said not only are those banks shielded from the volatility of investment banks, but they should also benefit from increased business lending, as JPMorgan did. That increase was also an encouraging sign for the U.S. economy.

JPMorgan's new loans to small businesses grew 71 percent in the quarter from last year to $12.6 billion, and loans to middle-market businesses grew 18 percent to $41.5 billion. Loans to companies related to international trade jumped 69 percent, to $30.1 billion.

However, lawsuits against U.S. banks for bad mortgage loans continued to pile up in the third quarter, including a federal suit against 17 banks for selling risky mortgage-backed securities. JP Morgan set aside $1 billion in the quarter to fight those kinds of lawsuits.

JPMorgan said it would lose $300 million in income from debit card fees in the fourth quarter. That's because of a new Federal rule that caps the amount banks can charge merchants for debit card usage at about 24 cents per transaction, down from an average of 44 cents. The rule went into effect Oct. 1.

Because of the lower debit card fees and other regulations that restrict revenue, JPMorgan said it would scale back on the number of bank branches it is opening around the country.

Dimon said the bank had planned to build more than 250 branches this year. "It's possible we won't now ... We'll probably reduce a little," Dimon said. The bank had said earlier in the year it would open 1,500 to 2,000 branches over the next five years.