Updated from 2:55 p.m. EDT
has found a new source of trouble -- its prime mortgage portfolio.
The banking titan said Thursday that it could see losses as high as $300 million a quarter by sometime in 2009 in its $47 billion prime loan portfolio, triple from current levels.
CEO Jamie Dimon attributed the rise in prime loans written off to a surge in high loan-to-value jumbo loans gone bad as a result of the poor housing markets.
"We started doing more jumbo
mortgages in '07 and part of that is '07 vintage... and we were wrong. We obviously wish we hadn't done it," Dimon said in a conference call to discuss earnings results this morning. "Prime looks terrible."
"It's exactly the same risk factors and all the other things," that contributed to rising losses in subprime and home equity loans, the CEO added, including high loan-to-value loans, stated income loans, and particularly troubled states including California, Florida and Arizona. "They're staggering numbers."
Additionally, JPMorgan's subprime losses could rise significantly to roughly $350 million a quarter in the same time frame, CFO Mike Cavanagh said also during the firm's conference call.
The bleak news did little to take the shine off the bank's second-quarter earnings report, which beat consensus estimates by 10 cents a share. Dimon is notorious for being overly cautious in his outlook and public statements. His sharp comments regarding prime mortgages could be a way to manage investor and analyst expectations as the bank trudges through the troubled housing and credit environment. The stock was rising 10.49% to $39.71 in recent trading.
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
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."
On a positive note, the bank lowered loss expectations for its home equity portfolio to roughly $700 million a quarter by the end of the year from a previous estimate of $900 million.
But JPMorgan Chase is remaining cautious on its home equity predictions.
"That number has come down, but the expected losses of subprime and prime is up a couple of million, so it's kind of a wash in our eyes," Dimon said. "It's just that if you look at the latest numbers of delinquencies and roll rates... it looks like it might be a little bit below than what it was before. It's very early, we do not know. People could argue there is some seasonality in that, so it's a little ray of sunshine, which is OK to grab onto for now."
JPMorgan Chase joins several banks so far that have reported better-than-expected quarterly earnings, including
PNC Financial Services
, which pushed the financial sector higher over the last two days.
The positive sentiment, however, is unlikely to last for long. Ever-struggling
is set to report earnings Friday morning. Other troubled banks including
are set to report next week.