In posting a third-quarter profit, JPMorgan Chase & Co. was able to defy widespread expectations that the effects of the financial crisis would drive it into the industry's growing red-ink ranks.
But lest anyone take the report as a hint of a turning point for the company, or the industry, absent were references from chief executive James Dimon to glasses half full, or games moving to their late innings. Rather, the talk was of an expectation that the toughest quarters may lie ahead.
"We have to be prepared that it gets a lot worse," he said on a call with analysts Wednesday.
"It's an unpleasant situation, and I don't want to underplay it," he said. "I hope that the financial crisis, with the powerful moves made by governments around the world, will start to ease."
Though Mr. Dimon said he expects his company to remain profitable this quarter and in 2009, he said he would be "shocked" if it turned in a robust performance in this quarter and the next one.
It reported a third-quarter profit of $527 million, or 11 cents a share, which was down 84% from a year earlier but beat analysts' expectations. Analysts polled by Thomson Reuters forecast a loss of 21 cents a share.
But JPMorgan Chase absorbed $3.6 billion in mortgage-related markdowns and a $642 million loss on Fannie Mae and Freddie Mac preferred securities. It lost $640 million on its acquisition last month of Washington Mutual Inc.'s bank operations.
Its provision for credit losses more than doubled, to $3.8 billion, from a year earlier, and Mr. Dimon said he expects to continue building reserves well into next year.
Profits fell at three of JPMorgan Chase's six key business lines: retail, down 61%, to $247 million; asset management, down 33%, to $351 million; and credit card services, down 63%, to $292 million. The $2.25 trillion-asset company said it expects rapid deterioration in the credit card services unit if there is a prolonged recession.
"We are braced for tough times," Michael Cavanagh, JPMorgan Chase's chief finance officer, said on a call with reporters Wednesday. "The watchful eye is certainly on what happens in the overall economy."
Nonperforming loans increased 26% from the second quarter; subprime home loans accounted for half of the increase, but prime mortgages accounted for 19%. JPMorgan Chase expects its loss rate on credit cards to rise from about 5% in the third quarter to 6% by the first quarter of 2009 and as high as 7% by the end of next year.
Keith Horowitz, a Citigroup Inc. analyst, wrote in a note Wednesday that there "was a lot of noise in the quarter" throughout the industry, and plenty of evidence that of conditions would get worse in the fourth quarter.
Mr. Cavanagh, however, underscored that JPMorgan Chase is well capitalized, with a Tier 1 ratio of 8.9% after the Wamu deal closed.
A $25 billion federal investment in the New York company — part of a larger financial rescue plan by the Treasury Department — will further bolster its capital position, Mr. Dimon said. He emphasized on a call with reporters that JPMorgan Chase "didn't need the money," but it agreed to take it and use it to support "a very bold and good" move by the government to prop up the banking system.
"If it's great for the system, it's also great for us," Mr. Dimon said.
And despite steep mortgage losses and mounting concern about consumers' spending strength, Mr. Dimon also noted that JPMorgan Chase posted solid results in several segments.
Its investment bank's profit nearly tripled from a year earlier, to $882 million, as fee income rose 20%. Commercial banking earnings rose 21%, to $312 million, and treasury and securities profits rose 13%, to $406 million, in part because of customer flight from weaker competitors.
"Despite tough times, we continue to invest in and build the business," Mr. Cavanagh said.
Nonetheless, he and Mr. Dimon repeatedly said conditions are likely to deteriorate, dragging on profits for at least the next two quarters. The company said that leveraged lending exposure likely would cut into investment banking earnings this quarter, and that economic struggles could dampen commercial banking earnings.
If JPMorgan Chase is among the strongest companies in U.S. banking, as many analysts maintain, what does its dire outlook say for the rest of the sector?
"It suggests things are trending even a little worse than expected," said Jeffery Harte, an analyst at Sandler O'Neill & Partners LP. "At this point it's really hard to know what to expect, but I wouldn't expect good news soon."
Nancy Bush, a bank analyst and the president of NAB Research LLC, said: "This environment is extraordinary and it continues to be extraordinary despite the government throwing everything at it but the kitchen sink. And we haven't really seen the full impact of a recession yet. It may get materially worse."