JPMorgan Earnings Weighed by Consumer

JPMorgan Chase's ( JPM) spike in consumer credit costs and cautious statements regarding overall credit mirrors mounting consumer woes in the economy.

The New York-based banking institution said profit fell 10% to $2.14 billion, or 40 cents a share, in the first three months of the year, but beat analysts' expectations by 8 cents a share, helped by strong results in its investment banking business. But the numbers were offset by the large provisioning the company incurred during the quarter for rising loan losses.

Shares were rising earlier in the day as investors applauded the company on the earnings beat as well as the proactive measures taken to boost reserves. The stock was up 2% to $33.21.

JPMorgan Chase's costs related to credit totaled $10.06 billion in the quarter, almost twice the total amount it had related to credit problems a year earlier. About $4.2 billion were additions to reserves as opposed to covering for charge-offs -- meaning that JPMorgan Chase expects losses to intensify.

The company's total loan loss reserve amounted to $27.3 billion, or 4.53% of total loans, compared to 3.62% in the fourth quarter and 2.74% at other large banks in the fourth quarter, it said. Nonperforming loans in the first quarter totaled $11.4 billion, excluding the loans from Washington Mutual that were already deemed "credit impaired," it said.

"It's reasonable to expect additional increases to credit reserves if the economic environment worsens," CEO Jamie Dimon said in a statement. "Yet, we are confident that even a highly adverse economic scenario would not compromise our overall strength and stability -- or our ability to enhance our franchises. We remain well-positioned to benefit when the economy recovers and remain committed to servicing our clients, investing in our franchise and building a stronger company for the future."

The significant addition to credit costs was primarily related to consumer loan losses in its credit card business and home lending, but all asset categories had weakening credit trends, it said.

JPMorgan increased its loss expectations for most consumer-oriented categories, when compared to guidance given in February at its investor day. The company's consumer charge-offs totaled $5.7 billion, more than double when compared to the prior year's quarter.

"You'll see some staggeringly high coverage ratios when you go through the businesses," CFO Mike Cavanagh acknowledged during the company's conference call early this morning. " Net charge offs did worsen in the quarter, but in line with what our expectations were back at investor day. And also our forward view on where losses go from here is upward, but generally consistent with what we were talking about last time."

Mounting job losses and dwindling confidence in the economy took a toll on consumers during the first three months of 2009. The unemployment rate soared to its highest levels in 26 years, reaching 8.5% during the quarter as businesses downsized to navigate through the environment.

Banks that have large consumer businesses including Bank of America ( BAC) and Citigroup ( C) are likely to continue to struggle. Wells Fargo ( WFC) on Thursday reported preliminary first-quarter earnings in which it surprised investors by saying it plans to report a big profit next week. Still, analysts expressed concerns regarding the San Francisco bank's trends in its loan portfolio.

On Wednesday, credit card issuers including the big banks as well as Capital One Financial ( COF), American Express ( AXP) and Discover Financial ( DFS) all noted that delinquencies worsened during the month of March.

"The message from banks reporting so far, including JPMorgan, seems to be that investment banking and mortgage were very strong in first quarter but credit remains extremely challenging," Goldman Sachs analysts wrote in a note.

While JPMorgan's non-performing asset growth slowed in the quarter, "this was mostly accomplished by much higher charge-offs," the note says. "In terms of the outlook, the key messages were credit card, prime mortgage, and corporate credit quality are all expected to get much worse."

Yet JPMorgan has the strength to "swallow these hits," while many other banks will not, the Goldman analysts say.

In card services, JPMorgan increased the provision for its losses by 17% from what it took in the fourth quarter to $4.6 billion. Card services reported a net loss $574 million for the first quarter, a decline of $1.2 billion from the prior year's quarter, fueled by the higher provision for credit losses.

JPMorgan blamed Washington Mutual's subprime card lender, Providian, for the increase in card losses as the environment weakens. During the first quarter, the company said its managed net charge-off rate -- which includes loans held and those that are securitized -- was 7.72% during the quarter, up from 5.56% in the fourth quarter. Even if WaMu's card business is excluded, the company's managed net charge off rate would have still been 6.86% during the quarter.

Dimon had previously said that he does not expect the company to be profitable in cards services this year.

Depending on unemployment rates, the firm's credit card charge-offs will rise.

If unemployment rises to 9%, the charge-off rate for WaMu's card business are expected to rise to 18% and 24% by the end of the year, while charge offs could range between 9%-9.5%, excluding WaMu's card business, the company says. Cavanagh warned that credit card charge-offs could rise 200 basis points in the second quarter alone.

Consumer lending, which includes mortgage originations, home equity loans, auto loans and leases and student lending, also posted a loss.

JPMorgan estimates that losses in its home equity portfolio could rise as high as $1.4 billion a quarter vs. $1.09 billion in charge-offs in the past quarter; prime mortgage losses could top $500 million over the next several quarters vs. $312 million in quarterly charge-offs; subprime mortgage losses (excluding WaMu's credit impaired portfolio) could range between $375-$475 million a quarter vs. charge offs of $364 million last quarter, according to presentation materials.

It also said that it's was adding to reserves against its small business borrowers as well, reflecting the weakening credit environment.

Dimon said to expect losses on the consumer side over the next 12 months.

"Eventually they will peak," he said on the call. "But they've been going up consistently. We've shown you here that they been going up even more... as long as they continue to go up reserves will probably have to be added too. One stop going up you don't have to add to reserves anymore. That will be a joyous quarter."

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