JPMorgan profit hurt by home equity loans

By Tim McLaughlin

NEW YORK (Reuters) - JPMorgan Chase & Co. (JPM.N: Quote, Profile, Research, Stock Buzz) said on Wednesday it tripled the amount set aside for loan losses as even borrowers with good credit defaulted on home equity loans, hurting the bank's quarterly profit.

The negative trend provides a new worry for investors. Until now, most of the angst has been focused on subprime lending, or loans to people with weak credit.

JPMorgan's stock, a Dow 30 component, sank $1.75 or 3.5 percent to $48.17 in early afternoon trade and was one of the biggest losers in the Dow Jones industrial average. The index was off about 1 percent.

JPMorgan Chief Financial Officer Mike Cavanagh said losses on home equity loans to prime borrowers, or those with good credit, will steepen, partly because U.S. housing prices have flattened or fallen in some areas.

The No. 3 U.S. bank said second-quarter net income was $4.2 billion, or $1.20 a share, compared with $3.5 billion, or 99 cents a share, a year earlier. That beat analysts' average estimate of $1.08 a share, helped by a sharp rise in investment banking revenue and big gains from private equity deals.

But the bank set aside $1.53 billion for loan losses, up from $493 million a year earlier. About a one-third of the increase resulted from higher loss estimates on home equity loans in which borrowers had little equity in houses with falling values.

Deutsche Bank analyst Mike Mayo estimated that the extra money set aside for loan losses reduced JPMorgan's earnings by about $350 million, or 10 cents a share.

"It's definitely a change in trend that we're reacting to," Cavanagh told reporters on a conference call.