January 17, 2008 / 2:02 AM / in 10 years

JPMorgan Consumer Woes Hurt Profit, But Not Stock

NEW YORK (Reuters) - JPMorgan Chase & Co (JPM.N) said on Wednesday quarterly profit fell a worse-than-expected 24 percent as the No. 3 U.S. bank lost $1.3 billion on risky mortgages and set aside more money for rising losses on home-equity loans.

Investors, however, rewarded JPMorgan for turning a profit, while some U.S. banks post huge losses from bad bets on subprime mortgage-related securities. JPMorgan shares rallied 5.8 percent, their biggest percentage gain in two months.

JPMorgan Chief Executive Jamie Dimon was bearish about consumer credit quality, but he said rough financial markets made it more likely the bank would make an acquisition.

Still, JPMorgan has significant exposure to cash-strapped U.S. consumers who face higher energy and food costs, while they watch the value of their homes slide.

“Though the numbers were slightly weak, you have to give Jamie Dimon credit for avoiding most of the problems that have plagued his competitors,” said Thomas Russo, a partner at Gardner Russo & Gardner, where he helps invest more than $3 billion.

JPMorgan reported fourth-quarter income from continuing operations of $2.97 billion, or 86 cents a share, down from $3.91 billion, or $1.09 a share, in the year-earlier quarter.

On a net basis, JPMorgan’s quarterly earnings fell a steeper 34 percent compared with $4.53 billion a year ago, a figure boosted by a one-off gain from selling its corporate trust unit to Bank of New York.

HOME EQUITY LOSSES

Analysts, on average, had looked for JPMorgan to earn 91 cents a share, according to Reuters Estimates.

JPMorgan’s market capitalization of about $137 billion is now larger than Citigroup Inc’s (C.N) $130 billion. Citigroup, which has more assets, lost $9.83 billion in the fourth quarter, compared with JPMorgan’s profit of nearly $3 billion.

On the other hand, Dimon and his team have underestimated the losses on the bank’s $95 billion portfolio of home equity loans.

Late last year, Dimon said home equity losses would be $250 million to $270 million per quarter over the next several quarters. On Wednesday during a conference call, the company said the losses could be $100 million more per quarter than its earlier forecast.

Home-equity losses also contributed to the 38 percent decline in fourth-quarter profit at Wells Fargo & Co (WFC.N), the first decline in more than six years.

JPMorgan, Wells Fargo and other U.S. banks have been burned by lax underwriting, reliance on independent brokers to find them customers and faulty real estate appraisals. The higher defaults include borrowers considered to have better credit than risky subprime customers.

Merrill Lynch analyst Guy Moszkowski said in a research note JPMorgan’s credit quality is as bad as Citigroup‘s.

“And you could argue (JPMorgan) doesn’t reserve enough” for losses, he said.

    PREPARED FOR RECESSION

    JPMorgan set aside $2.3 billion in 2007 to build its reserve for credit losses. More than $1 billion of that amount was for home equity losses exacerbated by falling home prices.

    Credit Suisse Credit Suisse analyst Susan Roth Katzke said she lowered her 2008 earnings per share estimate to $4.20 from $4.45 because of concern over credit-related losses.

    Meanwhile, the company said credit card spending slowed in December, a sign the U.S. economy is hurting.

    Dimon said the bank is prepared for a recession if it comes. He also wants to continue to take market share from rivals in the U.S. mortgage industry, despite a housing crisis and rising payment defaults.

    Profit at JPMorgan’s investment banking operations dwindled to $124 million from $1 billion in the year-ago period. The bank reduced the value of subprime positions by $1.3 billion while debt underwriting fees declined 39 percent because of less activity on bonds and loan syndications.

    The bank’s retail financial services division, which includes more than 3,000 branches, saw profit rise 5 percent to $752 million. Average total deposits rose 4 percent to $208.5 billion from the year-ago quarter.

    Net income at the bank’s credit card services fell 15 percent to $609 million on a higher loss rate.

    Bright spots for the bank were treasury services and asset management. The segments saw profit rise 65 percent and 29 percent, respectively.

    Reporting by Tim McLaughlin; Editing by Dave Zimmerman/Andre Grenon

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