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JPMorgan Dampens Outlook

Officials say the investment bank could take a breather.

JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. Report

got a big boost in the third quarter from its investment bank, but don't look for a repeat performance from the nation's third-largest bank in the current quarter.

The New York banking conglomerate, after reporting a 30.5% gain in third-quarter profit, dampened expectations during a conference call with analysts and investors.

"The fee pipeline in the investment bank remains very strong. But as we said before, the pace and amount realized of that pipeline depends on the markets and what the issuers tend to do," says JPMorgan CFO Michael Cavanagh. "We don't expect to set records quarter after quarter after quarter. So expectations are a little lower for us than what we saw in this quarter."

Jamie Dimon, JPMorgan's CEO, estimates that investment banking fees should fall by $100 million to $200 million in the fourth quarter. "I remind people that when the markets close down, the pipeline changes very quickly," he says. "The pipeline is still strong. It's a little bit weaker than it was. But there is still a very healthy backlog of business."

The subtle warning from Cavanagh and Dimon on investment banking revenue took a bit of the luster off JPMorgan's profit report and led to a selloff in the stock. In early afternoon trading, shares were down 98 cents, or 2%, to $47.01. The warning from the JPMorgan executives came a day after Wall Street giant

Merrill Lynch

(MER)

posted outsize earnings, but lackluster results from its investment bank.

Without that somewhat sobering warning, it likely would have been a banner day for JPMorgan, as the bank's third-quarter profit surpassed analyst expectations.

In the quarter, the lender earned $3.3 billion, or 92 cents a share, up from $2.53 billion, or 71 cents a share, in the year-ago period. Net revenue at the New York bank rose 8% to $15.4 billion. The Thomson Financial consensus had the bank earning 86 cents a share on revenue $14.6 billion.

Still, the big story in the quarter was the investment bank, which generated record fees from debt underwriting business and merger advisory services. Revenue at the investment bank rose 4.5% to $4.67 billion. Investment banking fees rose 44% to $1.4 billion.

Yet despite the big revenue gain, net income from the investment bank fell by 9% from a year ago because noninterest expenses were up 8%. The bank attributes the rise in investment banking expenses to higher performance-based compensation and the impact of new accounting rules with regards to stock-based compensation plans.

"There is some concern that this quarter's revenue strength there was kind of a one-time event," says Jeff Harte, an analyst at Sandler O'Neill & Partners. "You can always pick at whether investment banking or trading revenues are going to be recurring. That's anybody's guess."

JPMorgan is the first of the big three U.S. banks to report earnings this week. On Thursday,

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Citigroup

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and

Bank of America

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, the nation's two biggest banks, will report.

JPMorgan's earnings come a day after Merrill Lynch also reported a blowout third quarter. But investment banking revenue at Merrill Lynch was weaker than expected, especially compared with earlier results from

Goldman Sachs

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,

Bear Stearns

(BSC)

and

Morgan Stanley

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.

Merrill's revenue from investment banking fell by 3% from a year ago and by 26% from the second quarter, to $857 million, largely from declines in stock and bond underwriting. Merrill's quarter was saved by the outsize performance of its trading operation and a big gain from the merger of its asset management group with

BlackRock

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.

But many on Wall Street say it's too soon to read much into these somewhat sobering outlooks for investment banking.

Brad Hintz, an analyst at Sanford Bernstein, writes that the remainder of this year and next year "should be a positive operating environment for Merrill Lynch." He says "equity capital markets and M&A advisory continues to boom.''

Elsewhere at JPMorgan, the third quarter was a mixed bag.

Net revenue at the retail banking operation was largely unchanged, falling 1% from a year ago to $3.55 billion.

Like most other banking companies, JPMorgan is struggling with margin pressures and deposit competition. Loans rose 10.2% from a year earlier, to $463 billion. Deposits rose 8.8%, to $582 billion, largely from an increase in timed deposits.

Commercial banking net revenue rose 6.4% to $933 million.

The provision for credit losses dropped 35% from a year ago to $812 million. But the amount of more money the bank set aside for bad loans and other assets rose by 65% from the second quarter of this year.

"We're starting to make tremendous progress,'' Dimon says. "We've built new data centers. We're becoming more efficient. Our unallocated overhead, which is a measure of our inefficiency, is kind of going away. We've got a ways to go to be a very efficient place. And to make sure our investments pay off."

Dimon particularly mentioned that the company needs to improve its customer service. "We think some of our competitors have done a great job in that," he says.