that third quarter profit was $1.02 to a share on revenue of $24.4 billion, beating estimates of 91 cents a share and revenue of $23.40 according to Thomson Reuters.
The earnings beat however was a result of a $1.9 billion debt revaluation gain — earnings that are not related to the underlying operations of the investment bank.
In its press release announcing earnings, JPMorgan said, "the DVA gain reflects an adjustment for the widening of the Firm's credit spreads which could reverse in future periods and does not relate to the underlying operations of the company."
According to a Barclays report, JPMorgan's credit default spreads (CDS)nearly doubled from 83-to-162 basis points.
Its investment bank would have posted the lowest net earnings and revenue result since the worst of the financial crisis without the debt-valuation adjustment.
Of the investment bank earnings, JPMorgan CEO Jamie Dimon said in a press release, "The Investment Bank's revenue, excluding the DVA gain, was down substantially; however, we are gratified that the business maintained its number one ranking in global investment banking fees."
Net income from JPMorgan's investment banking operations dropped 20 percent to $1.64 billion from $2.05 billion in the second quarter of 2011. The result was better than the third-quarter results a year ago, when the investment banking unit brought in a profit of $1.29 billion.
Revenue at the investment bank fell 13 percent, to $6.37 billion from $7.31 billion in the second quarter, beating company forecasts. It was also more than revenue of $5.35 billion this time a year ago. The beat was attributed to its fixed income and equity trading businesses.
Expectations were for JPMorgan to earn $1 billion in investment banking fees and roughly $3.77 billion in trading revenue, making overall investment banking revenue forecasts of roughly $4.8 billion the weakest quarterly figure since the 2008 financial crisis when the bank reported an overall loss in the fourth. Without the debt revaluation gain, JPMorgan's underlying investment bank revenue of $4.48 billion was slightly lower than pessimistic estimates.
DVA gains aside, which the company said "could reverse in future periods" the third-quarter results casts into doubt whether the investment bank will grow for the year compared with 2010.
The earnings also show that while revenue contracts, earnings may stay strong. Nine months into the year, revenue is now on track to rise 10 percent and net income is set to rise 18 percent compared with last year — without the DVA gain, revenue would be close to flat for the year.
In a September Barclays Capital financial services conference, JPMorgan investment banking head Jes Staley said that the bank's trading business would fall 30 percent from the second quarter, when it registered a total of $5.39 billion in revenue, and that investment banking revenue would plummet roughly 50 percent to $1 billion.
Staley said, "I think you can safely expect a decline in our markets revenue broadly speaking of roughly 30 percent third quarter to second quarter... whether it's the equity capital markets calendar, whether it's the debt capital markets calendar, whether it's corporations putting a pause on the M&A activity, it's fairly easy to get to a point where our Investment Banking fees in the third quarter should be roughly around $1 billion."
The grim forecast proved to be overly pessimistic for now — and it was a reflection of a quarter when markets and deal volumes deteriorated as the possibility of a return to crisis grew with concerns over government indebtedness and the health of U.S. and European banks.
In a research note after the conference, Barclays Capital analyst Jason Goldberg wrote, "Looking at our expectations for third quarter 2011, we expect all major capital markets revenue categories to decline amid the U.S. debt-ceiling debate/credit downgrade, European financial concerns, falling global equity markets and heightened volatility."
In the third quarter, the S&P 500 index fell 14 percent and the MSCI World Index dropped 17 percent. Meanwhile, the VIX, a gauge of general risk aversion, averaged 31 during the quarter, reflecting an almost doubling of fear from the second quarter's average level of 17.
Currently the VIX is above 40, indicating that since the quarter ended, worries of a crisis haven't subsided entirely. The market's volatility has been even worse for banks. In the third quarter the KBW Bank Index fell more than 25 percent.