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JPMorgan 2Q Earnings Hit With $4.4 Billion 'Whale' Loss

Updated to include comments on clawbacks and trader departures.

  • JPMorgan Chase reported second quarter earnings of $5 billion or $1.21 a share, beating estimates.
  • The bank reported revenue of $22.9 billion, also beating estimates.
  • Excluding one-time accounting gains, JPMorgan earned $1.09 in earnings per share, versus an estimate of 76 cents.
  • 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."

    "[It] is a sign that the situation is under control and they believe that they can manage the business through the ordinary course of business," says Peter Tchir, founder of TF Market Advisors and a former credit derivative trader for Deutsche Bank, UBS and RBS.

    JPMorgan shares rose over 5% in afternoon trading to $36.04, on its earnings and trading loss.

    "The key story is that the CIO "whale loss" is within expectations and mostly complete. This overhang is now largely removed and bodes well for the company as it refocuses on the underlying businesses," wrote Oppenheimer analyst Chris Kotowski, in a note to clients that highlighted improvements in JPMorgan's expense and loan provisions.

    While JPMorgan's core earnings beat expectations, a $2.1 billion release of loan loss reserves and accounting gains on 'debit valuation adjustments' may dampen the bank's earnings beat. Excluding the impact of DVA, JPMorgan's net revenue was $6 billion and net income was $1.4 billion. KBW banking analyst David Konrad had estimated profits to be $2 billion, while revenue would come in at $5.4 billion.

    In a call with analysts, CEO Dimon said that the bank would look to resume a previously announced $15 billion share repurchase program after it submits a new capital plan to the Federal Reserve. Dimon said he hopes to have the bank positioned for buybacks by the fourth quarter.

    JPMorgan suspended the stock repurchase program when the banks' trading loss was first revealed in May. On the call, chief financial officer Douglas Braunstein also said that loan loss reserve releases are likely to continue as credit quality in the banks' mortgage lending operations improve.

    "We continue to be conservatively and appropriately reserved," said Braunstein, who noted that credit card related reserve releases are mostly over.

    Mortgage lending was a bright spot for JPMorgan, with loan originations rising nearly 30% year-over-year and 14% sequentially to $43.9 billion. Those earnings and similar second quarter morgtage origination growth at Wells Fargo (WFC) may reflect a wider recovery in the housing market.

    Still, even as JPMorgan sees some of its businesses most tied to the U.S. economy improve, questions are likely to remain about its trading losses and investment banking unit. In an investor call, CEO Dimon even fielded questions about whether the bank should split its securities unit from its retail bank.

    -- Written by Antoine Gara in New York

    Stock quotes in this article: JPM 

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