* Bond trading, underwriting revenue rise
* Acknowledges difficult bond market conditions
* Bank may have to accelerate cost-cutting
* Mortgage lending volume may fall 30-40 percent
* 2nd qtr EPS of $1.60 beats Street view of $1.44
(Adds investor comments, financial details, updates stock
By David Henry
July 12 JPMorgan Chase & Co, the largest
U.S. bank, posted a 31 percent increase in second-quarter
earnings on Friday after underwriting income jumped and bond
trading revenue rose.
JPMorgan, the first of the major U.S. banks to report
results for the quarter, managed to book more profit from
trading corporate bonds even as debt prices broadly fell. The
bank's comments made some investors hopeful that rivals with big
trading arms will also post strong second-quarter results.
Shares of Goldman Sachs Group Inc, Morgan Stanley
and Bank of America Corp were up more than 1
percent as of late Friday afternoon.
But JPMorgan also acknowledged that market conditions have
grown difficult, and that it might need to accelerate
cost-cutting. Since mid-May, U.S. bond markets have suffered
their worst two-month selloff in a decade, as the Federal
Reserve has said it is planning to taper its massive bond
purchases, known as quantitative easing.
The bond market weakness puts Chief Executive Jamie Dimon in
a tough spot. Mortgage rates are rising, which could slash
mortgage lending volume by 30 to 40 percent, said Chief
Financial Officer Marianne Lake on a call with investors. But
U.S. economic growth is still subdued, meaning demand for most
other loans is hardly surging.
"It's a difficult environment," said Gary Townsend,
co-founder of hedge fund Hill-Townsend Capital, which invests in
financial stocks. "The bank is not doing as well as it can in a
better interest-rate environment."
The bank's results beat analysts' average forecast. Its
shares were down 0.5 percent at $54.88 on Friday afternoon. The
stock had jumped 25 percent this year as of Thursday's close,
helped by growing confidence that the U.S. economy is on the
road to recovery.
However, the stock has fluctuated wildly in recent weeks
because of concern that higher bond yields would cut in to the
value of bank assets and weigh on capital levels, even if in the
longer-term higher yields can lift interest income.
BY THE NUMBERS
Overall, net income rose to $6.50 billion, or $1.60 a share,
in the latest quarter, from $4.96 billion, or $1.21, a year
Analysts on average had expected earnings of $1.44 a share,
according to Thomson Reuters I/B/E/S.
Twenty-four cents of the earnings per share came from
dipping into funds the company had previously set aside to cover
loan losses. More than half of that reserve release was from a
real estate loan portfolio that has benefited from rising home
prices, and the rest was from loans on credit cards.
Higher interest rates reduced the value of investment
securities at the bank, by one measure offsetting four-fifths of
the additional capital it generated during the quarter. JPMorgan
improved some of its capital ratios by reducing its
risk-weighted assets, according to a presentation for an
Revenue from fixed-income and equities trading rose 18
percent. Trading revenue in last year's second quarter was hurt
by the European debt crisis.
Investment banking was a second strong suit for JPMorgan.
Revenue climbed 17 percent to $3.1 billion, driven by higher
fees from underwriting debt and equity issues. Fees from
advising companies on mergers and acquisitions fell by 15
percent to $304 million.
For the bank as a whole, revenue receded by 3 percent to $12
billion. The drop reflected a 7 percent slide in noninterest
revenue that was hurt by lower mortgage fees and related income.
Net interest income fell 1 percent, reflecting lower deposit
margins and declining loan balances.
HOUSING MARKET TRANSITION
JPMorgan's mortgage business is in flux now. U.S. mortgage
rates have risen, with the main 30-year rate having risen more
than three-quarters of a percentage point over the quarter to
That cut in to the bank's pretax income from making mortgage
loans, which fell 37 percent to $582 million, including loans
the bank had to buy back. The bank did make more loans - they
rose 12 percent to $49 billion - but rising rates cut in to the
profitability of the loans.
The bank could be forced to cut costs in the business, CFO
Lake said. Because it is unclear when volumes will drop, and it
takes time to cut costs, drops in lending volume could challenge
profitability, Lake added.
JPMorgan is the second-largest U.S. mortgage lender after
Wells Fargo & Co, with an 11 percent market share as of
the first quarter, according to industry newsletter Inside
During the second quarter, JPMorgan put further distance
between itself on the so-called London Whale debacle of a year
earlier, when bad bets on the credit market ultimately cost the
bank more than $6 billion.
In the year-earlier period, the unit that held the trades
booked losses of $1.76 billion. Those trades have since been
switched over to JPMorgan's investment bank.
The second-quarter results are the first the bank has
released since Dimon overwhelmingly won a shareholder referendum
in May on whether he should hold both the chairman and the chief
JPMorgan's quarterly report, along with one the same day
from Wells Fargo, the fourth-largest bank, marks the start of an
intense 1-1/2 weeks of results from major financial
Citigroup Inc, the third-biggest U.S. bank, is to
report on Monday, followed by Bank of America, Goldman Sachs and
(Additional reporting by Tanya Agrawal in Bangalore and Lauren
Tara LaCapra in New York; writing by Frank McGurty; editing by
Dan Wilchins, Ted Kerr, Lisa Von Ahn and Matthew Lewis)