Higher expenses, lower profits from venture capital investments, and a sluggish quarter for underwriting and loan syndications combined to create two very different results at the soon-to-be-merged Chase Manhattan Corp. and J.P. Morgan & Co.
Chase said third-quarter profits fell 24% from the same period last year, to $905 million, and per-share earnings of 68 cents fell 25 cents short of Wall Streets consensus. Morgan said profits rose 16%, to $514 million, and earnings per share of $2.77 beat the consensus by 15 cents.
Last month $426 billion-asset Chase unveiled plans to acquire Morgan in a stock transaction then valued at $33 billion. In a conference call Wednesday, Chase executives appeared apologetic about the companys third-quarter performance, but executives from both companies reiterated their enthusiasm for the merger.
Chase chief financial officer Dina Dublon said, It was a disappointing quarter for us, but the results should not overshadow our progress.
Analysts said the differences between the two companies fortunes during the quarter highlight the benefits of their combination.
Chases profits were impacted not only by a decline in venture capital gains but by a weak quarter for syndicated lending and underwriting two of its main businesses. Morgan was able to make up for weaknesses in some capital markets activities with equity derivatives trading one of its marquee businesses.
Diane Glossman, an analyst at UBS Warburg, said the companies could expect to see significant improvement when you put the two together.
Chase Capital Partners, Chases equity investment unit, recorded a loss of $25 million, compared with a gain of $377 million last year.
It had unrealized writedowns of $560 million in its portfolio. Much of that was attributed to investments in publicly traded telecommunications companies Triton PCS Holding Inc. and Telecorp PCS. At the end of the second quarter the value of Chases holdings in those companies was $1.2 billion. A quarter later the value of the investments had fallen to $600 million.
This is not a business for the faint-hearted, Ms. Dublon said. She used the two telecommunications investments as an example of how perceptions might not be aligned with reality. Chases original investment in those two firms was $58 million, she said.
Chases revenues rose 4%, to $5.4 billion, while expenses rose 23%, to $3.6 billion. Executives acknowledged during the conference call that the expense issue was a concern. We are exceedingly focused on this expense issue, said Geoffrey Boisi, a vice chairman.
Revenues from corporate and investment banking rose 16%, to $1.87 billion, but profits from the business declined 9%, to $384 million, largely because of higher compensation expenses and spending to build up the business and integrate acquired companies.
Investment banking fees rose 26% from the third quarter last year, to $613 million, but fell 4% from the second quarter this year, reflecting a slowdown in syndicated lending and bond underwriting, the company said.
Trading revenues were flat over last year, at $680 million, and down 19% from the second quarter. Fees from mergers-and-acquisitions advisory services, and equity underwriting helped offset declines in bonds and syndicated loans.
Chase said nonperforming assets fell 4% from the second quarter, to $1.82 billion.
Other businesses showed impressive gains. Revenues from processing services rose 9%, to $875 million. Private banking revenues climbed 36%, to $305 million. In consumer banking, revenues rose 3%, to $2.6 billion, driven by gains in deposit fees, brokerage activities, mortgages, and consumer finance.
J.P. MORGAN
The $270 million-asset company said revenues increased 17%, to $2.3 billion, and fee revenues rose 19%, to $1.9 billion.
As at Chase, Morgans expenses rose because of higher compensation. They were up 23%, to $1.6 billion. Morgan said it has been hiring aggressively for its investment bank. The companys employee base has risen 11% since last year, to just over 17,000.
Right after announcing their deal, Chase and Morgan said that about 3,000 jobs would be eliminated because of overlap.
Investment banking revenues at Morgan rose 16%, to $426 million, on gains from derivatives origination activities, the company said. Profits from the business fell 22%, to $58 million, because of higher expenses.
Advisory fees fell 4%, to $195 million; fees from syndication and underwriting rose 6%, to $205 million. In equities, revenues rose 78%, to $448 million, reflecting improved derivatives trading results, the company said.
Revenues from equity investments plunged to $14 million, from $341 million in last years third quarter. Morgan said gains were more than offset by an unrealized markdown of $100 million, much of that associated with an investment in a telecommunications firm.
Proprietary trading revenues skyrocketed to $310 million, from $6 million in the third quarter last year.
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