MORTGAGE WEAKNESS CLOUDS J.P. MORGAN PROFIT SURGE / THE WALL STREET JOURNAL

EARNINGS

Updated July 12, 2013, 11:23 a.m. ET

Mortgage Weakness Clouds J.P. Morgan Profit Surge

By DAN FITZPATRICK And SAABIRA CHAUDHURI

 

 

J.P. Morgan Chase JPM +0.20%& Co.'s second-quarter earnings rose 31% as its trading operations benefitted from market turmoil, but lending income dropped as its mortgage business slumped.

 

Chris Dieterich and Rolfe Winkler discuss Q2 earnings released by J.P. Morgan and Wells Fargo.

 

J.P. Morgan's performance shows how the biggest banks are still struggling to overcome lackluster loan demand, a weak economy and a slew of new regulations that are crimping profits. The bank relied on a $1.5 billion, or 15 cents-a-share, reduction in reserves set aside for future loan losses to bolster profit in the second quarter. Investors aren't pleased big banks continue to rely so heavily on improving credit conditions, and their attendant release of reserves, to pump results.
 

J.P. Morgan reported net income of $6.5 billion, or $1.60 a share, versus $4.96 billion, or $1.21 a share, a year earlier. Revenue on a managed basis, which excludes the impact of credit-card securitizations, jumped 13% to $26 billion, beating the estimates of analysts polled by Thomson Reuters.
 

J.P. Morgan and other big banks are contending with a sudden and sharp rise in long-term interest rates, a move that could help widen the gap between banks' cost of borrowing and income from lending. But J.P. Morgan's net interest margin, a measure that tracks how much profit it earns on its loans, fell in the quarter to 2.60% from 2.83% in the first quarter. Total loans also fell.

The firm said it expects the measure of lending profit to be "relatively stable" in the second half of 2013 and be "modestly up" in the third quarter as compared to the year-ago period.

 

J.P. Morgan is viewed as well positioned for rising interest rates since its securities portfolio is more heavily skewed toward shorter-term instruments and its sizable investment banking and trading operations could benefit from the turmoil. In the second-quarter revenue from its fixed-income trading operations was up 18% from the year-earlier period. But a drop in the value of the firm's securities portfolio caused a measure known as accumulated other comprehensive income to drop 83% from the year-ago period, to $389 million. That drop, for accounting reasons, did not affect the firm's net income.
 

Chief Financial Officer Marianne Lake told investors Friday that mortgage refinance volumes could drop substantially if interest rates remain unchanged or rise.

During a conference call with investors after the bank reported second-quarter earnings, Ms. Lake said pressure on the mortgage refinance business from the sharp rise in mortgage rates in June continued into July.
 

"We expect it could have a significant impact on the refinance market side and the second half of the year," she said. "If mortgage rates stay at or above current levels, the market could be reduced by an estimated 30% to 40%."
 

Net income in J.P. Morgan's mortgage business dropped 14% during the quarter.
 

The bank in its second-quarter results also highlighted several positive signals from consumers and businesses. Average loan balances in the commercial banking unit were $131.6 billion, up 11% from a year earlier and up about 2% from the prior quarter, indicating companies are taking on more credit to fund inventory and capital improvements. Commercial banking recorded a profit of $621 million, down 8% from a year earlier but up 4% from the first quarter.
 

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J.P. Morgan's investment banking arm turned a profit of $2.84 billion, up 19% from the year earlier and about 9% from the prior quarter.

The consumer and community banking arm--the unit that deals with customers who have checking accounts and credit cards--recorded a profit of $3.09 billion, a roughly 6% fall from the year earlier, but a 19% increase from the prior quarter.

 

The bank's results also show U.S. consumers are defaulting less. Delinquency rates on loans fell across the board. As a result the bank was able to set aside less funds to handle future loan losses. The bank's credit-loss provision totaled $47 million, versus $214 million a year earlier and $617 million in the first quarter.

 

J.P. Morgan, like most banks, has been reining in costs as a way of making up for sluggish revenue growth. However, for the latest period, J.P. Morgan said its noninterest expenses rose 6% to $15.87 billion.

 

The bank has been cutting staff after earlier this year outlining plans to eliminate 17,000 jobs by the end of next year--giving it the smallest headcount among its peers—and reduce expenses by at least $1 billion annually. On Friday, the bank said headcount had dropped by 6,335 from a year earlier to 254,063.

 

 —Matthias Rieker contributed to this article. 

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