Updated to include comments on clawbacks and trader departures.
NEW YORK ( TheStreet -- JPMorgan Chase (JPM) beat second quarter earnings estimates; however it also said that an effort to hide a trading loss at its Chief Investment Office caused a $459 million restatement of the banks' first quarter earnings.
While the JPMorgan's highly anticipated earnings beat estimates, it's Friday the 13th disclosure of efforts to hide trading losses -- and an earnings picture colored by paper accounting gains and loan loss reserve releases -- may give investors cause for concern.
JPMorgan reported adjusted second quarter earnings of $1.09 a share, beating estimates, on higher than expected revenue of $22.9 billion. However, the bank benefitted from a one-time $2.1 billion release of loan loss reserves at its consumer lending operations, which outweighed investment banking unit results that were in-line with expectations.Overall, the bank reported a second-quarter profit of $5 billion, down 9% from this time in 2011. Analysts polled by Bloomberg had estimated that the bank would earn 76 cents in EPS on $21.6 billion in revenue. Excluding DVA, JPMorgan's profit was $1.09, beating estimates; however that number included 42 cents in one-time EPS gains from loan-loss reserve cuts and a Bear Stearns-related gain. Stifel Financial analyst Christopher Mutascio said that excluding one-time items the bank's core EPS performed at a 'run-rate' of $1.35, highlighting that JPMorgan's $2.27 billion in mortgage banking earnings and its $14.97 billion in expense beat expectations. Areas of concern include the company's net interest income, which fell to $11.2 billion as margins fell, and a Basel III tier 1 capital ratio that fell below 8%. In second quarter earnings, JPMorgan said that a trading loss at its CIO unit had escalated to $4.4 billion and that it will transfer the remainder of a position in illiquid credit products to its investment bank. However, the bank also said that the unit may have tried to hide losses on a souring of the large and illiquid trading position, causing a first quarter earnings restatement. The nation's largest bank by assets also said it would restate first quarter earnings by $459 million, according to a filing with the Securities and Exchange Commission. In the first quarter, JPMorgan earned a profit of $5.3 billion on $26.7 billion in revenue. "Recently discovered information raises questions about the integrity of the trader marks, and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses being incurred in the portfolio during the first quarter," the bank said in the filing. Year-to-date, JPMorgan has lost $5.8 billion from its CIO unit, with $4.4 billion in pre-tax losses coming in the second quarter and another $1.4 billion in the first. CEO Dimon said that future losses could be between $800 million to $1.7 billion, while noting that such calculations aren't a forecast. JPMorgan also said that it's CIO unit will no longer trade credit products and will focus on investing excess deposits in safer assets, as its CEO Dimon works to put trading fiasco behind the bank. "CIO was a mistake and we are sorry," said Dimon in an investor call. The bank said it will clawback two years' of pay for three London-based executives from the unit who are leaving the firm. Dimon said that the unit's former head Ina Drew voluntarily withdrew most of her compensation, and added that he had "enormous respect" for the longtime executive, who resigned in May. "Since the end of the first quarter, we have significantly reduced the total synthetic credit risk in CIO - whether measured by notional amounts, stress testing or other statistical methods," said Dimon in a statement. "Importantly, we have put most of this problem behind us and we can now focus our full energy on what we do best - serving our clients and communities around the world." "
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