JPMorgan Chase surprised Wall Street Thursday with a sharp increase in investment banking income at a time when other banks are warning of layoffs because of a slowdown in trading.
Investors had been expecting investment banking results at major Wall Street firms to decline on fears of a slowdown after Goldman Sachs Group Inc. said it plans to eliminate 230 jobs beginning in September. Citigroup analyst Keith Horowitz has warned that overall bank revenue from fixed income trading would likely drop 30 percent in the second quarter, stock trading by 15 percent. The explanation: Investors cutting back on trading because of market volatility caused by the European debt crisis.
As expected, JPMorgan Chase & Co.'s revenue from trading did decline _ 18 percent in fixed income and 14 percent in equities from the previous quarter. However the bank was able to more than make up the difference with higher fees from underwriting stocks and bonds. That lifted JPMorgan's earnings 13 percent in the three-month period ending in June.
The New York bank earned $5.4 billion, or $1.27 per share in the three months ending in June. That was above the $1.22 per share that analysts surveyed by FactSet had forecast. JPMorgan earned $4.8 billion, or $1.09 per share, in the same period a year ago.
JPMorgan's shares gained 1.8 percent to close at $40.35 Thursday.
Investment banking income jumped 49 percent, to $2.1 billion. The bank set aside $2.6 billion for compensation to its investment bankers, down from $2.9 billion in the same period last year. JPMorgan's Fees from debt underwriting increased 24 percent, equity underwriting fees increased 29 percent while fees from advising on mergers and acquisitions soared 69 percent.
JPMorgan shareholder Benjamin Wallace of Grimes & Co in Westborough, Mass., which manages $1.1 billion in assets, said the investment banking gains "reflects the strength of JPMorgan's diversified franchise."
At the same time, Wallace said he was worried about the bank's ever-expanding litigation reserves. JPMorgan's chief financial officer Douglas Braunstein said reserves to fight lawsuits from investors and law enforcement agencies increased by $1 billion to $9.7 billion.
"We believe our current reserves are our best estimate ... for a whole multitude of complex foreclosure related matters ... as well as payments for other settlements including the DOJ, state attorneys general and others," Braunstein said in a conference call with analysts to discuss earnings.
JPMorgan and other major banks have settled several disputes with regulators and investors in recent weeks, but that work is far from over. Many of the problems stem from banks selling mortgage-backed securities that lost value during the housing bust.
Bank of America Corp. reached an agreement with investors in late June to pay $8.5 billion for selling them poor-quality mortgage bonds. JPMorgan agreed to pay $154 million, also in June, to the Securities and Exchange Commission over allegations the bank had misled buyers of complex mortgage investments. And on July 7, JPMorgan agreed to pay $211 million to government regulators and the Justice Department after admitting one of its divisions rigged dozens of bids to win business from state and local governments.
JPMorgan's consumer lending business faltered in the second quarter. Despite low interest rates, the bank lost $454 million in its auto and mortgage loan operations, compared with income of $364 million in the prior year. People took out fewer auto loans and foreclosures continued to hurt the mortgage business.
JPMorgan's credit card business did relatively well. The bank's customers spent 10 percent more using their cards. At the same time, JPMorgan reduced its loan loss reserves by $1 billion as more people paid their bills on time.