JPMorgan Beats Estimates, but Pressure Mounts (Update 3)

JPMorgan earnings updated with more detail on specific business earnings and management commentary.

  • JPMorgan Chase reported a profit of $4.26 billion, or $1.02 per share.
  • Revenues was flat at $24.36 billion.
  • Analysts expected an EPS of 91 cents per share on revenues of $23.39 billion

NEW YORK ( TheStreet) -- JPMorgan Chase ( JPM) delivered a mixed third-quarter earnings report Thursday, reporting solid loan growth but a decline in core profitability amid a challenging investment banking and capital markets environment.

The second largest bank by assets kicked off the sector's earnings season, reporting a net income of $4.26 billion or $1.02 per share on a managed basis compared to a year-ago net income of $4.42 billion or $1.02 per share and a second quarter net income of $5.43 billion or $1.23 per share.

Revenues came in at $24.36 billion, a 11% decline from the second quarter revenue of $27.41 billion but little changed from $24.33 billion reported during the third quarter of 2010.

Analysts had expected JPMorgan to report an earnings per share of 91 cents on revenues of $23.39 billion, according to consensus estimates from Thomson Reuters.

Still, the initial reaction to the earnings was lukewarm, given the quality of the beat. The bank reported accounting gain of $1.9 billion, or 29 cents per share, from the decline in the value of its own debt, which helped offset a $542 million pre-tax loss from its private equity business and an additional $1 billion in pre-tax litigation expenses.

Pre-provision profit, a measure of a bank's profitability, fell 11% year-on-year and declined by 16% on a sequential basis. Non-interest expenses increased 8% over the year-ago period to $15.53 billion.

The bank's performance on credit quality was also mixed, with provision for credit losses seeing a 25% decrease over the year-ago quarter but a 33% increase on a sequential basis.

CFO Doug Braunstein said during the conference call with the media that the overall credit story was still positive but that the management remained cautious on trends in home lending. Loan loss reserves remained unchanged during the quarter, reflecting that caution. The bank also said it does not expect significant improvements in the charge-off rates in the near-term.

True to earlier guidance, fees from investment banking declined to $1 billion from $1.9 billion in the second quarter and $1.5 billion in the year-ago period, with revenues declining across its advisory, equity and debt underwriting businesses.

Trading revenue included a $900 million gain from the decline in the value of its debt(debt valuation adjustment or DVA gains). Excluding those gains, the investment banking division reported a 14% decline in fixed income, currency and commodities trading revenue and a 15% decline in equities market revenue over the year-ago quarter.

>> JPMorgan Investment Bank Avoids Crisis, For Now

"The Investment Bank's revenue, excluding the DVA gain, was down substantially; however, we are gratified that the business maintained its #1 ranking in Global Investment Banking Fees, and we believe that we have maintained a healthy share of the global sales and trading market," JPMorgan CEO Jamie Dimon said, adding that retail financial services and commercial banking businesses showed strength. Still, he sounded a cautious note, given the uncertainties in Europe and the U.S.

"Our shareholders should rest assured that we are being extremely cautious while navigating through this challenging economic environment. We are working hard to meet all of the requirements of the new and complex regulatory environment, and we continue to invest in the future while remaining focused on serving our clients and communities around the world," Dimon said in a statement.

There were some bright spots in the third quarter performance including very strong trends in loan growth. Small business lending soared 71% to $12.6 billion over the previous year. Middle market loans grew 18% to $41.5 billion over the previous year. Trade finance loans jumped 69% to $30.1 billion, helped by international demand.

Consumer and business banking revenue rose 6% overall on a year-on-year basis. Credit card sales volume was up 10%.

"Small business lending is up 71%. Booming number. Shocking number," said Dimon. "I think it has to do with partly with gaining market share." But he also said it was reflective of underlying demand.

"You might have expected some pullback in August and September after the debt downgrade but you don't see it in the numbers," said Dimon, commenting on the improvements in loan growth and a better-than-expected jobs report. "People aren't over-reacting."

He added that commercial banking strength had been particularly strong and took it as an indication that businesses are expanding.

The bank continued to tout its "fortress balance sheet", with a Basel 1 Tier 1 Common Ratio of 9.9%. Basel III Tier 1 Common Ratio is estimated at 7.7%.

JPMorgan completed $4.4 billion of common stock buybacks during the quarter, exhausting the $8 billion earmarked for buybacks for 2011. It did not outline plans for additional buybacks in the future.

On the topic of layoffs, Dimon said the bank will continue to run an efficient business. While it does not have a layoff program per se, he expects the investment bank to reduce headcount by about 1,000 over the next 18 months.

Shares were down nearly 3% to $32.26 at the open.

--Written by Shanthi Bharatwaj in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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