UPDATE 3-JPMorgan, defying turmoil in bonds, posts surge in profit
July 12 (Reuters) - JPMorgan Chase & Co, the largest U.S. bank, posted a 31 percent increase in second-quarter earnings on Friday after underwriting income jumped and bond trading revenue rose.
JPMorgan, the first of the major U.S. banks to report results for the quarter, managed to book more profit from trading corporate bonds even as debt prices broadly fell. It said, though, that difficult market conditions might force it to accelerate cost-cutting.
Equities and fixed income markets have grown more treacherous for traders in recent weeks as investors try to anticipate when the U.S. Federal Reserve will begin tapering off its massive bond purchases, known as quantitative easing. The program has kept interest rates near historical lows and helped nurse the U.S. economy back to health after the 2007-09 financial crisis.
The results topped the analysts' average forecast, and JPMorgan shares rose 0.3 percent to $55.31. The stock was already up 25 percent this year at Thursday's close, helped by growing confidence that the U.S. economy is on the road to a solid recovery.
However, the stock has been volatile in recent weeks because of concern that higher bond yields would erode the value of bank assets before they generate new revenue from lending.
BY THE NUMBERS
Overall, net income rose to $6.50 billion, or $1.60 a share, in the latest quarter, from $4.96 billion, or $1.21, a year earlier.
Analysts on average had expected earnings of $1.44 a share, according to Thomson Reuters I/B/E/S.
Twenty-four cents of the earnings per share came from taking back reserves the company had previously recorded for loan losses. More than half of that reserve release was from a real estate loan portfolio that has benefited from rising home prices, and the rest was from loans on credit cards.
Higher interest rates reduced the value of investment securities at the bank, by one measure offsetting four-fifths of the additional capital it generated during the quarter. JPMorgan improved some its capital ratios by reducing its risk-weighted assets, according to a presentation for an investor teleconference.
Revenue from fixed income and equities trading rose 18 percent.
While fixed income markets were broadly more profitable across Wall Street than they were a year earlier, investors will be watching to see if JPMorgan's improvement turns out to be better than those at peers that report results next week.
Investment banking was a second strong suit for JPMorgan. Revenue climbed about 15 percent to $3.1 billion, driven by higher fees from underwriting debt and equity issues.
For the bank as a whole, however, revenue receded by 3 percent to $12 billion. The drop reflected a 7 percent slide in noninterest revenue that was hurt by lower mortgage fees and related income. A drop in net interest income was more modest at 1 percent, reflecting lower deposit margins and declining loan balances.
HOUSING MARKET TRANSITION
The quarter also highlighted an ongoing transition in the U.S. housing market, where home sales are rising and new construction is increasing, but higher mortgage rates are slowing a boom in refinancing.
At JPMorgan, mortgage banking income, which comes from making home loans and servicing existing mortgages, fell 14 percent to $1.1 billion. But mortgage originations rose 12 percent to $49 billion.
JPMorgan is the second-largest U.S. mortgage lender after Wells Fargo & Co, with an 11 percent market share, according to industry newsletter Inside Mortgage Finance. It is also the third-biggest mortgage servicer.
During the second quarter, JPMorgan put further distance between itself on the so-called London Whale debacle of a year earlier, when bad bets on the credit market ultimately cost the bank more than $6 billion. In the year-earlier period, the unit that held the trades booked losses of $1.76 billion. Those trades have since been switched over to JPMorgan's investment bank.
The second quarter results are the first the bank has released since Chairman and Chief Executive Jamie Dimon overwhelmingly won a shareholder referendum in May on whether he should hold both posts.
The initiative in part reflected concern that the bank lacked sufficient oversight, leaving its vulnerable to the kind of excessive risk that led to the London Whale fiasco. In the end, however, shareholders appeared to be more concerned that Dimon would quit if he lost the vote.
Last month Dimon showed that he was increasingly confident that government investigations into company disclosures about the London Whale trades would fade as an issue for him and the company. At a conference in New York in June, he defended JPMorgan executives for their honesty in making timely public disclosures about the losses.
JPMorgan's quarterly report, along with one the same day from Wells Fargo, the fourth-largest bank, marks the start an intense week and a half of results from major financial institutions. Citigroup Inc, the third-biggest U.S. bank, is to report on Monday, and Bank of America Corp, Goldman Sachs Group Inc and Morgan Stanley are to report later in the week.