JPMorgan: Prime Loans Form Dark Cloud

The New York-based bank posted a net profit of $2 billion, or 54 cents a share, vs. $4.2 billion, or $1.20 a share, in the year-ago period. Analysts polled by Thomson Reuters had expected a profit of 44 cents a share. The 55% slide in profit was due in part to a $540 million after-tax loss related to the acquisition of Bear Stearns completed in May. Excluding the loss, JPMorgan earned $2.5 billion.

JPMorgan's bottom line also was cut into by $1.1 billion in writedowns to its leveraged loans and mortgage-related securities portfolios.

During the quarter, the company had $1.3 billion in credit costs related to higher charge-offs across all retail loan categories. Included in those costs is $600 million added to reserves to hedge against loses in its residential mortgage portfolio -- with approximately $430 million related to subprime and prime mortgage charge-offs, it said.

In the second quarter, JPMorgan charged off $104 million of prime loans, which was double its charge-off rate in the first quarter. Subprime charge-offs totaled $192 million of the $14.8 billion subprime portfolio, up 28% from the first quarter. Home equity charge-offs totaled $511 million, or 2.16%, of its $95 billion home equity portfolio, up from $447 million in the first quarter.

"Most credit trends deteriorated sequentially, but the only big surprise was prime," writes David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller. "JPMorgan Chase and other bank stocks are strong again today, likely on the lack of doomsday outcomes, so some measure of recovery of the recent steep sell-off is emerging. On the other hand, we remain somewhat cautious about calms before storms, as consumer and commercial losses will likely increase into early 2009, if not longer."