JPMorgan Chase & Co.'s better-than-expected quarterly results said a lot about the country's second-largest banking company, but even more about everybody else.
Specifically, the details underscored the advantages held by the very largest players, and the challenges ahead for midsize firms, as they all try to claw their way out of the financial crisis.
That was the take-away of numerous industry watchers after studying JPMorgan Chase's 36% leap in second-quarter profits. The New York company's blueprint for profitability — surging trading and fixed-income gains offsetting mounting credit card, business and mortgage loans losses — could set the tone of what to expect this earnings season from the large banking companies that have sizable capital markets outfits.
The results could also be a sign, though, of poor numbers to come from regional banks that have similar credit problems but do not have muscular investment banking divisions.
"You'll see strength from other banks — Bank of America, Citi — in the capital markets arena," said Keith B. Davis, an analyst with Farr, Miller & Washington, an investment management company in Washington. "The ones that don't have capital markets businesses are going to be even more exposed to credit costs — consumer, but also commercial real estate, where a lot of the regional banks are more focused."
William B. Smith, the president, chief executive and portfolio manager of the New York broker-dealer Smith Asset Management Inc., said JPMorgan Chase's showing could point to a growing profitability gap between large and midsize banking companies.
"JPMorgan is a hybrid. So I think that this is going to prove to be a little bit more of a difficult quarter for regionals. They don't have the trading activity," Smith said. "Also, the big banks don't have the exposure to the commercial side [of the lending market] — or they are not as exposed."
Jamie Dimon, JPMorgan Chase's chairman and CEO, said himself that the $2 trillion-asset company is better positioned to weather a pending meltdown in the commercial real estate market. That's because it has been rather conservative in making CRE loans over the last "eight or nine years" while shrinking that portfolio, he told analysts during a conference call Thursday.
JPMorgan Chase has a mostly "traditional" real estate portfolio, though it did acquire about $30 billion in commercial loans in its purchase of Washington Mutual Inc., Dimon said. He said that, though he expects the CRE market in the United States to get "worse consistently over the next several quarters," the losses to JPMorgan Chase would not be "materially significant to our numbers."
"It is a big deal for regional banks," Dimon said.
That's not to say the company doesn't have serious credit issues.
Its provisions more than doubled in the latest quarter from a year earlier, to $9.7 billion, including $8.5 billion set aside to cover bad consumer loans. It has been hardest hit in credit cards, a business line that lost $672 million in the quarter, compared with a profit of $250 million a year earlier.
The company also continued to be plagued by problems in its prime and subprime mortgage books, which booked substantially higher chargeoffs as more of those kinds of loans moved to nonperforming status. Its net chargeoff rate on prime mortgages was 3.07% in the quarter, up from 1.08% a year earlier. In the subprime book the chargeoff rate was 11.5%, versus 4.98% a year earlier.
Even with those credits costs, the company reported second-quarter profit of $2.7 billion, or 28 cents a share, versus a profit of $2 billion a year earlier. Analysts surveyed by Bloomberg on average expected earnings of 5 cents a share. JPMorgan Chase easily beat that forecast despite booking hefty charges related to its repayment of $25 billion in federal aid and a special assessment paid to the Federal Deposit Insurance Co.
JPMorgan Chase's strong showing was driven by a $1.47 billion profit in its investment bank, whose profits rose 273% from a year earlier. It also booked $820 million in treasury trading gains.
Dimon — who is known for giving cautious economic forecasts — caught market watchers off guard by signaling that his company could be reaching the bottom of its credit issues.
He said its "loan-loss reserves are getting pretty close to their peaks" after adding $1.7 billion more to the reserve in the quarter, bringing the reserve to $29 billion. In the first quarter the company added $4.2 billion to the reserve. Dimon also said it was seeing "a little bit of leveling off" in delinquent mortgages for the first time in several years.
Smith, for one, said he was heartened by sentiments that the worst may be passing.
"Jamie is always as straight a shooter as you are going to get," Smith said. "The most important statement he made is he's seen stabilization." Others were less impressed.
Richard Bove, the outspoken Rochdale Securities LLC analyst, described the optimistic outlook as "unusual" given how JPMorgan Chase usually has a "very sober outlook for the future."
"The reality is that this was a very bad quarter for JPMorgan Chase. Loans and deposits fell with deposits falling faster than loans. Nonperforming assets continue to rise," Bove wrote in a research note. "Capital gains are the reason for the strong revenue and earnings performance and these are not sustainable."