JPMorgan profit slumps on writedowns
NEW YORK (Reuters) - JPMorgan Chase & Co's fourth-quarter profit plunged 76 percent as it wrote down bad loans, signaling that even the bank that has avoided the worst of the credit crunch is struggling with the recession.
The bank turned a profit only because of special items; and after Moody's Investors Service cut the bank's debt rating one notch to AA3, its shares dropped as much as 4.5 percent before recovering.
"There's not much that's positive in JPMorgan's numbers," said John Stein, president of asset manager FSI Group in Cincinnati.
"JPMorgan will come out the other side of this, but they have got an awful lot of losses ahead of them," Stein added.
JPMorgan Chief Executive Jamie Dimon said last month that the bank had suffered in November and December, citing what he called the "normal culprits:" mortgages, junk bonds, and loans funding buyouts. Analysts in recent days have expressed more concern about the economic outlook, which may have spurred JPMorgan to report results six days earlier than originally planned.
The bank said fourth-quarter net profit dropped to $702 million, or 7 cents per share, from $3 billion, or 86 cents per share, a year earlier. Revenue fell 0.9 percent to $17.2 billion.
Excluding one-time items, it had a loss of 28 cents per share -- much worse than analysts' average forecast of a profit of 1 cent, according to Reuters Estimates. The big miss was due mostly to a jump in loan loss reserves.
Dimon called the results "very disappointing."
The bank has managed to turn a profit so far during the year-long recession, but it still faces significant headwinds. Its losses from the September acquisition of failed thrift Washington Mutual may be up to 17 percent higher than originally expected, the bank said in a presentation accompanying its earnings release.
Credit card losses are expected to rise to 7 percent of the portfolio on an annual basis at the end of the first quarter, and may be as high as 8 percent by year-end, it said. In better times, credit card losses can be closer to 4 percent or 5 percent.
"If the economic environment deteriorates further, which is a distinct possibility, it is reasonable to expect additional negative impact on our market-related businesses, continued higher loan losses and increases to our credit reserves," Dimon said.
JPMorgan's difficulties reflect the broader trouble in the U.S. banking sector, which has received trillions of dollars of government support through capital injections, debt guarantees and other measures.
Bank of America Corp is set to receive billions of dollars of additional support from the U.S. government to finance its purchase of Merrill Lynch & Co Inc, a person familiar with the matter said Wednesday. And Citigroup agreed earlier this week to shed a stake in one of its crown jewels, the Smith Barney retail brokerage business, to raise capital.
"We are not out of the woods at all," said Rick Meckler, president of investment firm LibertyView Capital Management in New York.
JPMorgan's shares were up 33 cents or 1.3 percent to $26.24 in late morning New York Stock Exchange dealings, after trading as high as $27.05 and as low as $24.75 earlier. In the credit derivatives market, the cost of protecting $10 million of JPMorgan debt against default for five years fell to $155,000 a year from $165,000.
INVESTMENT BANKING HIT
JPMorgan said special items in the fourth quarter included $1.1 billion of benefits from its purchase of WaMu, and a gain of $627 million from ending Chase Paymentech Solutions, a payments and merchant-acquiring joint venture.
The worst hit in the period came from the investment banking division, which posted a loss of $2.36 billion, compared with a profit of $124 million a year earlier.
The bank boosted the amount of money it set aside to cover credit losses by $4.1 billion before taxes, and recorded pretax writedowns of $2.9 billion for loans funding leveraged buyouts and mortgage-related positions at the investment bank.
The bank said it ended the year with a Tier 1 capital ratio of 10.8 percent. Regulators consider 6 percent "well capitalized."
Through Wednesday, JPMorgan shares had fallen 17.9 percent this year, compared with a 19.2 percent decline in the KBW Bank Index.
In 2008 the shares fell 27.8 percent, while the index plummeted 50 percent.
(Additional reporting by Ryan Vlastelica, Ellis Mnyandu and Dan Wilchins; Editing by Gerald E. McCormick and John Wallace)
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