WASHINGTON JPMorgan Chase & Co said it has racked up $1.5 billion of losses so far this quarter on mortgage-linked assets, reflecting deepening turmoil in credit markets.
Shares of the third-largest U.S. bank by assets fell 9.5 percent, as investors grew increasingly disappointed with a bank that had largely sidestepped the worst of the credit crunch, and analysts cut their profit estimates.
Chief Executive Jamie Dimon has kept JPMorgan profitable even as rivals such as Citigroup Inc and Merrill Lynch & Co posted a series of multi-billion dollar quarterly losses.
"If you're a huge global trading house, it's very hard to hide from the devastation," said Steve Persky, chief executive at Dalton Investments in Los Angeles.
JPMorgan's shares fell as the broader financial sector dropped. Lehman Brothers fell 12 percent to $16.21, while Bank of America Corp, Citigroup, and Goldman Sachs all fell more than 6 percent.
JPMorgan revealed the losses in a regulatory filing late Monday. The bank said trading conditions have "substantially deteriorated" in the third quarter, and mortgage-backed securities and loans have weakened.
The New York-based bank also has substantial exposure to credit cards and other consumer debt that looks increasingly vulnerable as the U.S. economy grows slowly.
The Financial Times said JPMorgan was under pressure to write down mortgage assets, in part because of Merrill's decision to sell $30.6 billion of repackaged debt to a private equity fund at 22 cents on the dollar.
As of June 30, JPMorgan held $19.5 billion of prime and Alt-A mortgage exposure, $1.9 billion of subprime mortgage exposure, and $11.6 billion of commercial mortgage-backed securities (CMBS) exposure, the filing showed.
"These mortgage exposures could be adversely affected by worsening market conditions, further deterioration in the housing market and market activity reflecting distressed sellers," JPMorgan said. Loss estimates exclude hedging, it said.
Trading results could also be hit if the bank's own debt became more valuable. That could theoretically make it more expensive to buy back its own debt, resulting in an accounting charge.
Analyst Richard Bove at Ladenburg Thalmann argued that JPMorgan's difficulties raised questions about the reason for the bank's current mix of businesses.
JPMorgan, formed through a series of acquisitions over the last decade, was supposed to have consumer banking and capital markets businesses that complemented each other: when one was doing poorly, the other was supposed to be doing well.
"Unfortunately, the first time this concept was tested, it did not work. Both (businesses) seem to be declining in tandem with each other," Bove wrote in a note to clients. Bove cut his estimates for the bank's earnings for 2008 through 2010.
The bank did return calls seeking comment.
JPMorgan shares fell $3.97, or 9.5 percent, to $37.92 on the New York Stock Exchange.
Last month, JPMorgan posted a smaller-than-expected 53 percent decline in quarterly earnings on resilient stock and bond underwriting revenue but cautioned that the mortgage market and the economy were getting worse.
In the filing, JPMorgan said that it expected continued credit deterioration in its consumer portfolio, requiring more reserves for losses, during the rest of 2008.
It also said home equity charge-offs could keep rising this year, while prime and subprime mortgage net charge-offs would likely rise "significantly." It said further mortgage deterioration was likely into 2009.
JPMorgan held $16.3 billion of unplaced loans funding buyouts and unfunded commitments for loans as of June 30, the filing said.
"Leveraged loans and unfunded commitments are difficult to hedge effectively, and if market conditions further deteriorate, additional markdowns may be necessary," it said.
Lehman Brothers Inc analysts on Tuesday cut their 2008 profit forecast for JPMorgan to $2.30 a share from $2.60, but kept an "overweight" rating and $50 share price target.
(Reporting by Dan Wilchins in Washington; additional reporting by Tenzin Pema in Bangalore; Editing by Gerald E. McCormick and Mike Miller, Leslie Gevirtz)