J.P. Morgan Manages A Profit

J.P. Morgan (JPM) reported a  76% decrease in net income of $702 million, or $0.07 a share, largely due to a loss in Investment Banking. Analysts were expecting earnings of $0.00 a share. This loss was derived from more markdowns on leveraged loans and mortgage trading positions, as well as weak trading results. Net revenue was negative $302 million, down $3.5 billion from last year. The firm did face higher credit costs because of deterioration in loan portfolios. Worsening loans affect banks in many ways, because as they are written off they reduce the reserves banks hold for loan losses. Eventually, reserves require replenishment from loan loss provisions, which hurts net income.

Declining reserves also affect a bank’s capital levels, which is why we see banks cutting dividends and recieving capital injections from the government. These loans also affect a bank’s net interest margin, because even loans that do not earn interest must continue to be financed with deposits, which require interest payments.

Although results were disappointing, Jamie Dimon commented that the firm “continued to see underlying growth in many business areas.” The bank had a record performance in rates, currencies, commodities and emerging markets. While the earnings show that J.P. Morgan will not emerge from the credit crisis unscathed, they have faired much better than their competitors and are still considered one of the healthiest banks on the street.

On one side, the bank will continue to see some of its core operations deteriorate further. J.P. Morgan has added over $4 million to loan-loss reserves in anticipation of future losses, with Mr. Dimon saying defaults are likely to rise in credit cards, mortgages, and other loans.  While these results are very different from the J.P. Morgan that was the top earning bank in 2007, investors were simply relieved that the bank even managed a profit in this all but normal recession, and they did not cut their dividends as many banks have done.

The message that comes from the earnings is that economic conditions are not going to improve at any time in the near future, but J.P. Morgan is in the best financial position to weather the storm and come out on top when markets rebound.

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