Updated from 9:09 a.m. EDT
J.P. Morgan Chase
, the nation's second-largest bank, reported a 13% drop in third-quarter earnings, a figure that is sure to disappoint Wall Street just four months after the Bank One merger closed.
The quarter was marred by the poor performance in proprietary trading, something that has bedeviled the bank over he past few years. The performance was so bad that that bank said it has made some management changes on its trading desk.
In the quarter, J.P. Morgan earned $1.4 billion, or 39 cents a share, compared with $1.6 billion, or 78 cents a share, in the year-ago period. The bank's earnings included $741 million in after-tax, merger-related charges that depressed J.P. Morgan's earnings by 21 cents a share.
But it was the bank's operating earnings, which excluded a merger charge, that Wall Street was looking at, and the number was a big disappointment. On an operating basis, J.P. Morgan earned $2.2 billion, or 60 cents a share, falling 15 cents below the Thomson Financial consensus estimate of 75 cents a share.
Total revenue at the bank also fell short of expectations, coming in at $12.5 billion, while Wall Street was expecting $13.2 billion.
In early trading, shares of J.P. Morgan fell $1.12, or 3%, to $36.86.
Bank executives, in a press release, blamed most of the poor results on "weak trading results" in its investment bank. At the same time, they said the merger with Bank One, completed in July, was going well.
In a conference call, J.P. Morgan CEO William Harrison said the poor results on the trading desk the past few quarters have led to a management reshuffling over the past two weeks.
Jamie Dimon, J.P. Morgan's president and CEO-in-waiting, didn't mince words, calling it a "terrible" quarter for trading.
"These are terrible results," Dimon said on the same conference call. "We don't feel good about it."
Revenue in the investment bank dropped 3% to $2.7 billion, despite 43% increase in fees from underwriting and merger advisory work. But revenue from its fixed-income division, which includes bond trading, dropped 23% to $1.1 billion.
The performance of the bank's trading group was the big drag. Trading-related revenue was $842 million, down from $1.2 billion a year ago. That figure included the dismal bond trading numbers, which plunged to $657 million from $1.16 billion.
"We were obviously on the wrong side of a few of the markets," said Dimon. "We had bad trading and poor client levels."
Dimon, however, dismissed the notion that he has an eye on scaling back J.P. Morgan's trading operation, something that Bank One was a bit player in. He said he is not opposed to putting the bank's capital at risk in proprietary trading as long as it makes money.
"It shows how difficult it is to predict investment bank earnings," said Timothy Ghriskey, president of Solaris Asset Management, a Connecticut hedge fund. "Clearly this an area that needs more risk control."
Ghriskey's fund currently has no position in the bank's stock, because he's concerned about the near-term risks associated with the combining of J.P. Morgan's and Bank One's operations.
"I think Jamie Dimon is just beginning to put his imprint on the company,'' said Ghriskey. "The fear here is it's going to be a difficult merger. When you see quarters like this, it lends some evidence of that to the bears."
It wasn't all bad news for the bank, however. In other areas, J.P. Morgan posted higher year-over-year revenue, largely due to the addition of Bank One, which was strongest in retail banking and credit card services.
The merger bank's retail financial services division generated revenues of $3.8 billion, up from $1.5 billion. Its credit card division took in $3.8 billion in revenue, up from $2.2 billion.