The drag of the European debt crisis on investment banking weighed on JPMorgan Chase & Co's fourth-quarter profit, sending financial stocks tumbling even as the bank provided evidence that the domestic economy is strengthening.
Chief Executive Jamie Dimon said the New York-based bank was seeing signs of improvement in credit quality as well as loan demand from corporations and consumers in the United States.
"We see a mild recovery which actually might be strengthening, and it's broad," Dimon said in a conference call with reporters following the earnings report on Friday. "Hopefully, it will add to more jobs. We have seen jobs growing ... it's not enough but it could be self-sustaining."
Loan balances in JPMorgan's commercial division were up 13 percent at the end of December compared with a year earlier, the sixth consecutive quarterly rise in the measure of business borrowing.
But Dimon sounded renewed alarm on the European debt crisis. "I would put myself in the 'increasing worried' category," he said.
His comments came shortly before a senior euro zone government source said credit rating agency Standard & Poor's was set to downgrade several euro zone countries, not including Germany. The report sent the euro and U.S. markets lower.
JPMorgan shares fell 2.9 percent in afternoon trading on the New York Stock Exchange, while the KBW banks index was down 0.7 percent.
JPMorgan is the first major U.S. bank to announce results for the fourth quarter. Its weak investment banking results suggest Wall Street firms Goldman Sachs Group Inc and Morgan Stanley will also report tough quarters when they issue results next week.
Others such as Bank of America Corp and Citigroup Inc, which also report results in the coming days, could benefit from the stronger business loan demand that JPMorgan experienced, but could also face problems in investment banking and housing loans.
Dimon, in a conference call with stock analysts, predicted that other banks will also report what he called "good loan growth in commercial banking." Shares of U.S. regional banks seemed to reflect Dimon's view as they traded better during the day, with PNC Financial Services sliding 0.8 percent and US Bancorp rising 0.8 percent.
But Dimon also conceded that at least some of JPMorgan's new loans came from taking business from competitors. European banks have been retreating from lending in the U.S. and JPMorgan has been deploying new loan marketers in California and Florida.
In a discouraging sign for upcoming results from private equity firms such as Blackstone Group LP, JPMorgan's competing unit showed an $89 million loss in the quarter because of a decline in investment values.
JPMorgan's results "show that there are major headwinds against the banking industry and it requires a strong management team to battle the headwinds," said Rick Meckler, president of investment firm Libertyview Capital Management in New York.
"The bigger negatives tend to be the housing and mortgage situation and investors questioning, 'Have we really hit bottom in this sector or is this just a black hole?'"
In afternoon dealings, Goldman Sachs shares were down 2.5 percent, Morgan Stanley was off 2.9 percent, Bank of America fell 2.8 percent, and Citigroup dropped 3.1 percent.
"We all knew the fourth quarter would be difficult," said Gary Townsend of Hill-Townsend Capital. "But the overall economic outlook has been improving from an economic standpoint starting in December."
JPMorgan said fourth-quarter net income was $3.72 billion, or 90 cents a share, down from $4.83 billion, or $1.12 a share, a year earlier.
Wall Street analysts, on average, had expected 90 cents a share, according to surveys by Thomson Reuters I/B/E/S.
There had been some expectation the bank would do better, but that view faded after Dimon warned on December 7 that investment banking was not improving. "He did a great job guiding people down, but people thought he would beat" the estimate, said Paul Miller of FBR Capital Markets.
Revenue declined 17 percent to $22.2 billion on an adjusted basis, missing the average Wall Street estimate of about $23 billion.
Investment banking revenue fell 30 percent to $4.36 billion, hurt by a 39 percent drop in underwriting and advisory fees, a 13 percent decline in fixed income, and a 31 percent fall in equity markets.
The results were complicated by an accounting adjustment that reduced earnings by 9 cents per share to reflect a change in the market value of JPMorgan debt during the quarter. In the third quarter, the accounting adjustment added 29 cents per share to profits.
The bank also booked more than half a billion dollars in additional expenses for litigation, primarily for mortgage matters, an amount that totaled 8 cents a share. It said reducing its loan loss reserves added 11 cents per share to earnings.
"The earnings show how well JPMorgan can be managed in one of the roughest times," said money manager Michael Holland, founder of Holland & Co. "They were able to pull off a meet-or-beat quarter."
The bank's return on equity, a key measure of shareholder profits, fell to 8 percent from 11 percent a year earlier and 9 percent in the 2011 third quarter.
The company's quarter-end share count declined 4 percent from a year earlier as it bought back stock.
For the first time in three quarters, JPMorgan booked more income and revenue from its credit card and card loan businesses than from any other area.
Net income from the consumer credit areas was $1.1 billion, or 28.2 percent of total profit. Investment banking profit, by far the largest generator of profits in the first three quarters of 2011, fell 52 percent to $726 million, or 19.5 percent of total quarterly profit.
(Additional reporting by Jed Horowitz and Angela Moon in New York, Rick Rothacker in Charlotte, North Carolina, and Ben Berkowitz in Boston; editing by Alwyn Scott, John Wallace and Gerald E. McCormick)