Steep declines in private equity portfolios and lackluster capital markets claimed two more victims Wednesday, with J.P. Morgan Chase & Co. and FleetBoston Financial Corp. reporting second-quarter profits substantially below expectations.
Profits at Morgan Chase plunged 77%, to $378 million, from unexpectedly large writedowns in its private equity portfolio, lower capital markets revenues, and merger charges. And Fleet's net declined 45%, to $531 million, for the same reasons.
Like Merrill Lynch & Co. and Charles Schwab Corp. the day before, Morgan Chase and Fleet tempered their outlooks on growth for the rest of the year.
Morgan Chase executives said Wednesday that they did not expect a snappy rebound in capital markets, and that the company was hunkering down on expenses and now expects to add to the thousands of job cuts it had already planned for this year.
"Our crystal ball is no better than yours," said chief financial officer Dina Dublon in a conference call with analysts. "We are not building in a recovery" this year.
She said during a press conference early Wednesday that the second half would look like the first.
Fleet was more specific. "We have a restrained view of capital markets," said Eugene McQuade, the chief financial officer of the Boston-based banking company, in a conference call. Fleet is forecasting earnings per share of $2.75 to $2.85 for the full year, below the current consensus of $3.31, and $3.60 to $3.90 for next year, for which the consensus is $3.73.
J.P. MORGAN CHASE & CO.
Ms. Dublon projected that job cuts would "significantly" exceed the 5,000 the company had originally targeted as a result of last year's merger of J.P. Morgan with Chase Manhattan Corp., though she would not be more specific. Four thousand jobs have already been eliminated this year, three-fourths of them in investment banking. Operations and technology jobs are not likely to be eliminated until the fourth quarter, the company said.
In addition, Marc J. Shapiro, the vice chairman of finance and risk management, said savings from the Morgan-Chase merger and from an ongoing "right-sizing" initiative would likely be closer to $4 billion than to the $2 billion originally predicted for merger savings alone.
Despite $1.02 billion of writedowns and writeoffs in its private equity portfolio - mostly in investments in privately held telecommunications companies - and dampened revenues from trading, Morgan Chase attempted to put a positive spin on the quarter. Excluding merger charges, the company's operating income fell 61%, to $690 million or 33 cents a share; Wall Street was looking for 65 cents.
"We are a stronger company than we were 90 days ago," Mr. Shapiro said.
Other executives, including Geoffrey Boisi, co-head of investment banking, said the "pipelines" for business looked encouraging.
Arguably, the market slump could not have come at a worse time for the company, whose existence is predicated on being a premier wholesale and investment banking organization. Still, some analysts said the timing of the merger may actually have helped.
"They would have been worse off if they had not done it," said Diane Glossman, an analyst at UBS Warburg. Combined, the company is "hanging in there."
Revenues from investment banking fell 15%, to $3.78 billion. Loan and bond origination helped offset lower merger and acquisition advisory fees. Mr. Boisi alluded in the conference call to the loss of $100 million in M&A fees; a good chunk of that would have come from Morgan Chase's role advising General Electric Corp. on its now failed deal to acquire Honeywell International.
Trading revenues of $1.61 billion were off 11% from a year earlier and 24% from the strong first quarter. Private banking and asset management revenues fell 15% from a year earlier, to $788 million. Consumer banking revenues rose 5%, to $2.64 billion.
Expenses declined 4% from last year's second quarter, to $5.1 billion, and 6% from this year's first quarter - reflecting stricter cost control measures, executives said. "The bank has been cutting jobs more than it figured it would," Ms. Dublon said. "We are right-sizing for a much lower level of market activity."
Shares of Morgan Chase rose 3%.
FLEETBOSTON FINANCIAL CORP.
Excluding charges, earnings per share came in at 48 cents, below the consensus of 79 cents.
Total revenues declined 29% from last year, to $3.2 billion. Fee revenues were sliced nearly in half, falling 46%, to $1.3 billion because of a $100 million loss from capital markets, the company said.
FleetBoston took $470 million in pretax writedowns in its private equity portfolio, also because in its view the market had lost the momentum that sparked huge gains last year. "The writedowns put us ahead of the curve," Mr. McQuade said. "Our earnings [from private equity] will remain subdued until liquidity returns."
The company also struggled with a sharp drop in business at its technology-oriented San Francisco investment banking unit, FleetBoston Robertson Stephens Inc., and at its New York-based discount brokerage, Quick & Reilly. Revenues from Robertson Stephens declined 34.5%, to $104 million, on lower trading and brokerage fees, while revenues from Quick & Reilly dropped 14%, to $157 million, on lower market-making income. Investment services revenues declined 19%, to $363 million.
Fleet has also been reining in expenses, cutting more than 500 employees from Robertson Stephens so far this year. Mr. McQuade said the company had achieved $100 million in savings from an internal expense reduction program and as a result of its acquisition of Summit Bancorp in Princeton, N.J.
Expenses fell 28%, to $2 billion. Shares of Fleet rose 4%.
SOUTHTRUST CORP.
The Birmingham Ala., banking company beat analysts' estimates by a penny, reporting profits of $137.6 million, or 40 cents a share, during the second quarter, an increase of 15%.
Bright spots included growth in net interest margin, to 3.54% in the second quarter from 3.48% a year earlier. Net interest income rose 6.5%, to $377.5 million. Meanwhile, growth in service charges, investment fees, and other fees helped boost noninterest income by 18%, to $140.5 million.
Nonperforming assets accounted for 0.8% of all loans, rising $24.5 million from the first quarter, when they represented 0.73%. SouthTrust said the troubled loans are "geographically and industry dispersed" and include just one commercial real estate loan of more than $3 million.
Shares of SouthTrust fell 2%.
David Boraks contributed to this article.
