* Q1 EPS $1.31 vs Street view $1.18
* Better credit quality, capital markets help
* Questions remain about strength of recovery
* Shares down 2.8 pct in afternoon trading
By David Henry
April 13 An uptick in trading and dealmaking
lifted JPMorgan Chase & Co's first-quarter profits out
of the funk of late 2011, but the recovery fell short of the
good times the largest U.S. bank enjoyed a year ago.
The results beat Wall Street expectations. Investment
banking revenue rebounded from the 2011 fourth quarter as fears
about the European debt crisis eased, prompting more companies
and investors to return to fixed-income and equity markets.
JPMorgan also got a boost from improvements in credit
quality and loan demand - a trend seen in the performance of
Wells Fargo & Co as well. The No. 4 U.S. bank separately
reported higher first-quarter profit as mortgage banking
improved and it set aside less money for bad loans.
"The revenue is what really impressed me," said Joe Terril,
founder of Terril & Co, a money manager in St. Louis, Missouri,
referring to a 24 percent jump in JPMorgan's total revenue from
the fourth quarter.
"It tells me there's more economic activity, maybe, than
what we were previously thinking - more demand for credit, more
demand for banking services, more business out there," he said.
The results from two of the largest U.S. banks confirm
investor optimism that has fed a market rally this year. The KBW
index of bank stocks is up more than 20 percent this
year, and JPMorgan shares are up 32 percent.
But on Friday, investors appeared no longer satisfied with
just tentative signs that the economy is on a path to recovery;
they now want to gauge its strength, and JPMorgan's numbers gave
them reasons to take a breather.
The bank's net interest margins - a core measure of
profitability of banks - fell, and JMP Securities analyst David
Trone said traditional banking revenue other than mortgage
banking remained sluggish.
JPMorgan shares fell $1.24, or 2.8 percent, to $43.60 in
afternoon trading on the New York Stock Exchange.
The results could raise expectations for rivals such as
Goldman Sachs Group Inc, Morgan Stanley, Bank of
America Corp and Citigroup Inc, which are due to
report quarterly results in the coming days.
Investors have been keen to hear bank executives say whether
they see convincing evidence that business demand for loans will
continue to increase, and JPMorgan Chief Financial Officer Doug
Braunstein offered them some hope.
Braunstein said a rise in the bank's business loan balances
reflected, in part, new strength in the economy. JPMorgan also
took market share from rivals. Business borrowing is considered
a sign of confidence that will lead to more hiring and, in turn,
more borrowing from banks by households.
The bank's business loan balances at the end of the first
quarter were up 3 percent from the end of December and up 16
percent from a year earlier.
Business loan balances at U.S. banks as of March 28 were up
14 percent from a year earlier, according to Federal Reserve
data, which uses slightly different measurements.
RESULTS BEAT EXPECTATIONS
JPMorgan said first-quarter net income fell 3 percent to
$5.4 billion from $5.6 billion a year earlier.
Earnings per share rose to $1.31 from $1.28 because of a 4
percent decline in share count due to buybacks. Analysts had
been expecting $1.18, according to Thomson Reuters I/B/E/S.
Braunstein said earnings were reduced by about 9 cents a
share by special items, including expenses for mortgage-related
matters and litigation reserves; an accounting adjustment for
the value of JPMorgan debt; and reduced reserves for bad loans.
In the year-earlier quarter, special items added 3 cents a
Revenue was $27.4 billion, up 24 percent from the 2011
fourth quarter and up 6 percent from the first quarter of 2011.
Investment banking posted net revenue of $7.3 billion, down
11 percent from a year earlier but up 68 percent from the 2011
JPMorgan's retail financial services booked a profit of
$1.75 billion, compared with a loss of $399 million a year
earlier, when the division was the bank's worst performing unit.
Revenue in the division, which houses the bank's expanding
branch banking system, climbed 40 percent to $7.65 billion.
A surge in litigation expenses, primarily to add to reserves
for lawsuits over mortgage matters left over from the financial
crisis, drove companywide expenses up 15 percent from a year
earlier. Litigation expenses rose to $2.7 billion from $1.1
Chief Executive Jamie Dimon said in a conference call with
analysts that the company set aside $2.5 billion more for
lawsuits after what he called "a thorough review" of claims.