J.P. Morgan Chase

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should stop reporting its earnings on the same day as


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It's true that both banks on Wednesday reported higher year-over-year profits for the second quarter. And it's also true that earnings at both were powered by strong performances from their consumer lending divisions.

But that's where the favorable comparisons for J.P. Morgan end.

J.P. Morgan's earnings were in fact a big disappointment, coming in well below the consensus estimates of Wall Street analysts. Even though J.P. Morgan reported operating earnings of $1.18 billion, or 58 cents a share, that number fell far short of the 65-cent average estimate of the analysts surveyed by Thomson Financial/First Call. The bank also reported net income of $1.03 billion, but analysts were focusing on the operating figure because it didn't include a number of previously announced restructuring charges.

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Citigroup, meanwhile, slightly exceeded Wall Street's expectations with its report that second-quarter net profits rose 15% to $4.08 billion. Citigroup posted earnings of 78 cents a share, a penny higher than the First Call estimate.

Wall Street traders and investors registered their displeasure with J.P. Morgan's earnings miss, pushing the stock down 45 cents to about $28 in afternoon trading, after the bank's shares opened higher in the morning. Shares of Citigroup rose more than $1 to $37.40.

But what may be more important than those bottom-line earnings numbers is that fact that outside of consumer lending, J.P. Morgan's other business lines showed some real weaknesses -- particularly investment banking, something that used to J.P. Morgan's bread-and-butter. Citigroup, meanwhile, demonstrated surprising strength in a number of areas, including investment banking, investment management and insurance.

"Citi was a solid quarter," says Timothy Ghriskey, a hedge fund manager with Ghriskey Capital Management. "In Citi you have a much more diversified range of businesses, and it shows in their earnings. J.P. Morgan has a more volatile mix of businesses." (Ghriskey owns shares of Citigroup, but not J.P. Morgan.)

Indeed, that volatility can be seen in the sharp year-over-year fall in investment banking profits at J.P. Morgan. Its earnings from investment banking work slid 38% to $485 million. The firm also reported a $165 million operating loss for its venture capital group J.P. Morgan Partners. But that's actually an improvement over a year ago, when the private equity group registered a loss of $610 million on a number of bad technology and telecom investments.

Now, given the trickle of new stock offerings and corporate merger activity, it should come as no surprise that investment banking would take a big hit at J.P. Morgan. But what makes the falloff in profits at J.P. Morgan particularly hard to swallow is that earnings from investment banking and corporate finance rose 4% year-over-year at Citigroup to $1.45 billion. Citigroup benefited from a rise in revenue generated from fixed-income trading and bond underwriting at investment-banking arm Salomon Smith Barney.


But it wasn't just in investment banking that Citigroup bested J.P. Morgan. Citigroup's investment management and private banking division posted a 23% gain in earnings to $505 million. J.P. Morgan also experienced a profit gain from managing money for others, but a much smaller 2% year-over-year rise to $118 million in operating revenues.

"Geographic and product line diversity are paying off for Citi," says Stephen Biggar, a bank analyst with Standard & Poor's. On the other hand, Biggar says investment banking still constitutes a disproportionately large chunk of J.P. Morgan's revenue stream, even after its merger with retail banking giant Chase Manhattan. So if investment banking suffers, it's difficult for J.P. Morgan to overcome the earnings shortfall, no matter how many loans or credit cards its sells to consumers.

Some say the second-quarter results are just more evidence of how far J.P. Morgan, despite its size, still needs to travel if it's going to develop a diversified revenue stream like Citigroup. Sean Egan, president of Egan-Jones Ratings, a small corporate bond rating service, says J.P. Morgan's management is finding that's a more difficult task and fraught with more risk than they expected when the merger was announced in fall 2000.

Still, even with the challenges J.P. Morgan faces in catching up to Citigroup, it seems investors treat both banks' stocks as more or less equal. Based on actual earnings for the first half of the year and analyst estimates for the second half, shares of J.P. Morgan and Citi trade for roughly the same multiple, with J.P. Morgan carrying a P/E of 11 and with Citi trading at a P/E of 12.

By historic standards both stocks are cheap. But clearly investors aren't giving Citigroup much of a premium over J.P. Morgan, even though Citi is showing itself to be the more solid performer.

It may be that investors are fearful of both stocks, which have sold off plenty in recent weeks, because of the myriad of investigations going on into the activities of Wall Street banks and brokerages. But based on performance, at least, it seems that if investors want to choose between one of these financial titans, Citi looks the better.

Commenting on the slide in Citigroup's stock this year, Citi Chief Executive Sanford Weill, during a conference call to discuss the earnings results, notes that the bank's board just authorized a $5 billion stock buyback plan. He added, "If you think the stock is cheap maybe you should buy it."