JPMorgan earns $3.6B, but loan losses remain high

JPMorgan Chase & Co. reported strong third-quarter earnings Wednesday as its thriving investment banking business more than offset rising loan losses that the bank warned would continue for the forseeable future.

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JPMorgan, the first of the big banks to report earnings for the July-September period, reported a $3.59 billion profit but also said it roughly doubled the amount of money it set aside for failed home and credit card loans in the quarter.

The bank’s earnings cheered investors, who sent JPMorgan stock and the overall market higher. Still, the bank’s performance shouldn’t be taken as a forecast for how well other banks did. Many financial companies don’t have such big investment banking operations, which includes trading of stocks and bonds and allowed JPMorgan to overcome its loan losses.

Banks including JPMorgan have predicted for some time that their loan losses would keep rising. And in JPMorgan’s earnings statement, CEO Jamie Dimon confirmed that this trend continues.

“Credit costs remain high and are expected to stay elevated for the foreseeable future in the consumer lending and card services loan portfolios,” Dimon said.

The company said for the second straight quarter that there are some signs of stabilization in delinquencies among consumer loans that are only recently past due. But Chief Financial Officer Mike Cavanagh said during a conference call with reporters that the bank “can’t at the moment be certain” that the trend will continue.

JPMorgan may be able to raise its 5 cent per share quarterly dividend to as much as 25 cents if loan losses stabilize and the company’s credit costs fall, Cavanagh said. The CFO said that an increase could come early next year, but he again cautioned that’s it too soon to know if the economy will recover enough to make a higher dividend possible.

Investors didn’t seem troubled by the bank’s dim credit outlook, and likely were more focused on the fact that big profits in divisions such as investment banking helped the New York-based bank earn 82 cents per share during the third quarter. Analysts forecast a profit of 52 cents per share.

JPMorgan said its investment bank net income came to $1.92 billion, up $1 billion from a year earlier as fixed income trading thrived.

The company’s stock jumped $1.34, or 2.9 percent, to $47 in morning trading.

JPMorgan, the nation’s largest bank by assets, has been considered one of the strongest financial companies during the past year’s turmoil. It has performed better than other large competitors in part because of its relatively light exposure to troubled subprime mortgages and commercial real estate.

However, traditional residential mortgages and home equity loans as well as credit cards continue to default at a rapid pace and that has eaten into JPMorgan’s profits.

In its earnings statement, the bank also described the near-term path of the economy as uncertain.

JPMorgan’s loss provision to cover current and future home loan defaults jumped to $3.99 billion, while its provision for credit card losses surged to $4.97 billion.

Cavanagh said that if the economy continues on a recovery path and doesn’t falter again, JPMorgan is probably close to reaching its peak loan-loss reserve levels.

Credit card defaults and mortgage losses are likely to continue to creep higher and lag an overall economic recovery. Losses on credit cards typically mirror unemployment, which rose to 9.8 percent in September.

Economists predict the jobless rate will eclipse 10 percent in the coming months.

JPMorgan said the percentage of credit card loans it wrote off as not being repayable in the third quarter reached 10.3 percent of its total portfolio. Cavanagh said during a separate call with analysts that the card loss rate is expected to reach 10.5 percent in the first half of 2010 and could go higher depending on the unemployment rate.

Loan losses were also pushed higher by weakness in the portfolios JPMorgan acquired when it purchased the failed bank Washington Mutual a year ago.

Fixed income markets accounted for two-thirds of the investment bank’s $7.51 billion in revenue. While the company’s trading operations were strong, JPMorgan was also able to write up the value of some investments that have started to recover after souring during the peak of the credit crisis.

Overall, JPMorgan generated $28.78 billion in revenue during the quarter, better than the $24.96 billion predicted by analysts.