JPMorgan Chase Squeezes a Profit Out of Its Soft Core

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The good news in JPMorgan Chase & Co.'s blow-out second-quarter results: Banks may finally be done bleeding money.

The bad: It could be a while before they really start making any more of it.

JPMorgan Chase cemented its status as the country's strongest banking company Thursday by reporting its biggest single-quarter profit since the 2004 merger that created the New York financial giant.

For the first time in more than two years, every single one of its seven business units was in the black as the two big laggards — retail banking and credit cards — returned to profitability with fewer homeowners and consumers missing loan payments.

Yet JPMorgan Chase's quarterly report, always an industry bellwether, delivered a mixed forecast: Though loan losses are falling and should keep doing so, revenue and income were largely flat on anemic consumer and business lending.

"I don't think you can spin it into a good thing that revenue is flat — it does not reflect a booming, healthy economy," said David G. Dietze, chief investment strategist at Point View Financial Services Inc. in Summit, N.J. "It does reflect very careful and astute management by JPMorgan, [being able to] eke out profits in a no-growth environment."

To be sure, several items in the $2.04 trillion-asset lender's results bode well for other large banking companies that will report earnings in the next two weeks. (Bank of America Corp. and Citigroup Inc. are to announce results today). Chief among them: Consumer loan losses are moving in the right direction.

The company's losses on home equity loans and mortgages to people with good and bad credit fell sharply, easing concern that the housing market may have gone into free fall after government programs subsidizing home purchases expired last quarter.

In credit cards, fewer people missed at least a single payment for the second straight quarter — a sign that the stabilization of unemployment is helping more U.S. consumers find sound financial footing.

"What we have seen is the improvement in underlying credit loss across all of our businesses," Mike Cavanagh, JPMorgan Chase's chief financial officer, said in a conference call with reporters.

Observers said they now expect other big banks with lots of consumer loans to release more loss reserves, a development that began in the first three months of the year across the industry and has the potential to buoy earnings for several quarters.

Easing consumer losses let JPM Chase essentially move to the bottom line a big chunk of capital set aside to absorb loan losses. This offset a soft showing in investment banking. This business, which had driven profits for more than a year, cooled in May thanks to the European debt crisis and volatility in the stock market.

Reserve releases in credit cards as well as investment and commercial banking freed up about $1.5 billion and helped boost profits to $4.8 billion, up 44% from the prior quarter.

"There has obviously been a lot of fear about a double dip in real estate — this is at least some evidence that things are actually getting better and not getting worse," said Charles K. Bobrinskoy, director of research at Ariel Investments LLC in Chicago.

Yet JPMorgan Chase is treading water when it comes to growth in profits that do not come from shuffling around loss reserves. This could be ominous for other lenders that are not as diverse or nearly well-run.

"The only thing you really have going for you right now is credit improved. … The weakness in all the revenue categories, I think that's troublesome," said Keith B. Davis, principal and research analyst at Farr, Miller & Washington. "There really are limited opportunities here for revenue growth. I don't know where it's going to come from."

Even Chief Executive Jamie Dimon said reserve releases are not true profits.

"We don't like to release loan-loss reserves," he told analysts. "We don't consider that earnings. I've always called that ink on paper. It means nothing, OK?"

Income was essentially static from traditional things that banks do to make money like originating mortgages and business loans, charging loan and deposit fees and collecting credit card income. Revenue was down notably in investment banking and pretty much flat everywhere else.

That is not to say that JPMorgan Chase is not lending. Second-quarter mortgage applications were the highest they had been in a year, while originations rose slightly from the prior quarter; business loan originations were also up. But both portfolios shrank as more loans ran off its books than were originated.

JPMorgan Chase has been among the more aggressive banks in the U.S. when it comes to hiring people and introducing products to capture revenue. In retail banking, it added four branches and more than 100 automated teller machines last quarter while its sales force grew by more than 450. Marketing expenses were up companywide, as were credit card sales volumes and new accounts.

But so far, market watchers said, all of those investments have been a zero-sum game.

Roger Lister, chief credit officer of U.S. and European financial institutions at DBRS Ltd., a Toronto credit ratings agency, said that JPMorgan Chase's results may mean that just maintaining stable revenue is the new high standard in banking.

"In general, it is going to be difficult seeing revenues growing significantly," he said. "Households are cutting back on debt. Holding flat is not a bad achievement."

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