* Net income $5.71 billion vs $4.26 billion year earlier
* Mortgage lending revenue climbs 36 pct
* CEO Dimon: "We believe the housing market has turned the
* Shares slip 1.8 percent in afternoon trading
By David Henry
Oct 12 JPMorgan Chase & Co posted a
record quarterly profit on Friday as falling interest rates and
a recovering housing market brought big increases in mortgage
The mortgage market, long a drag on bank results, is
starting to lift lenders' earnings again, and JPMorgan Chief
Executive Jamie Dimon said he was hopeful about the outlook for
U.S. residential real estate.
"We believe the housing market has turned the corner," Dimon
said in a statement.
JPMorgan suffered only modest losses in the latest quarter
from the "London whale" trades that brought it $5.8 billion of
losses in the first half of the year, signaling that it is
moving on after the scandal.
The improving housing market brought the bank a 36 percent
increase in mortgage lending revenue in the third quarter and
made up for the drag of weak demand from borrowers. In fact, a
$993 million increase in total mortgage fees neatly offset an
$831 million decrease in net interest income.
Analysts expect mortgage lending volume to continue to rise
after the Federal Reserve said in September that it would buy up
to $40 billion of mortgage bonds every month until the labor
market improved materially.
That announcement from the Fed has lowered mortgage rates.
According to the Mortgage Bankers Association, applications for
home loans jumped 16.6 percent in the week ended Sept. 28 from
the week before.
Wells Fargo & Co also benefited from the mortgage
bonanza, posting a 22 percent increase in third-quarter profit
But investors and analysts were concerned that JPMorgan's
profitability of loans, known as its "net interest margin,"
contracted. The bank's stock fell as much as 1.8 percent during
"The margin compression worries investors about what that
means for future earnings," said analyst Marty Mosby of
The bank said the difference between its cost of funds and
yield on assets fell to 2.43 percent from 2.47 percent in the
second quarter and 2.66 percent a year earlier.
MORTGAGE MARGINS DOUBLE
The bank's profit margins on mortgages that it sells to
investors, in contrast, is currently double the normal level,
Analysts asked the CEO whether the mortgage refinancing wave
will last until the economy strengthens enough to lift lending
"We don't expect to count on high margins and mortgage
origination forever," Dimon said. The refinancing trend, he
added, will continue "next quarter, maybe for a couple of
quarters after that, but it won't last much longer."
Dimon said he is not sure whether the latest Federal Reserve
move will drive the economy. "If the economy gets better we are
fine," Dimon said, explaining that the benefits would more than
offset a decline in refinancing.
The Fed's buying program did boost JPMorgan's profits in
fixed-income trading, which rose 33 percent, excluding
adjustments for changes in the value of the bank's debt. That
increase could bode well for other big investment banks due to
report results over the next week, including Goldman Sachs Group
Inc and Morgan Stanley.
JPMorgan's third-quarter net income was $5.71 billion, or
$1.40 a share, up from $4.26 billion, or $1.02 a share, a year
Analysts had expected, on average, $1.24 a share, according
to surveys by Thomson Reuters I/B/E/S. It was not immediately
clear whether the analyst forecast was comparable to the
Profits at JPMorgan's investment bank, excluding accounting
adjustments for changes in the value of JPMorgan debt, rose to
$1.7 billion from $1.2 billion a year earlier, when the European
debt crisis cast a darker shadow over the capital markets.
Dimon told analysts that risk in the remaining piece of the
"London whale" derivatives portfolio was reduced by about
one-third during the quarter after its management was taken over
by the company's investment bank from its Chief Investment
Office. Another related credit derivatives portfolio which had
remained in the CIO was closed out during the quarter with a
$449 million loss, bringing the total loss associated with the
whale trades to about $6.2 billion.
The bank set aside an additional $684 million, before taxes,
in the third quarter to cover legal settlements and judgments. A
year earlier, it boosted its legal reserves by $1 billion.
JPMorgan was sued last week by the New York state attorney
general over allegations that Bear Stearns, salvaged by the bank
in a 2008 takeover assisted by the government, had deceived
investors buying mortgage-backed securities in 2006 and 2007.
Though the allegations were similar to ones already made by
private investors in civil suits, the lawsuit raised concerns
among analysts that there are more litigation costs to come for
JPMorgan and other banks.
Dimon on Wednesday said the lawsuit was "unfair" because
JPMorgan had done the Fed "a favor" by taking over a broken Bear
JPMorgan shares were down 1.8 percent at $41.36 on Friday
afternoon. Through Thursday the shares were up 27 percent this
year, almost twice the rise in the Standard & Poor's 500 stock
index but about three percentage points less than the KBW Bank