JPMorgan Chase's earnings top forecasts

Viewed as one of Wall Street's strongest banks, decline in income is less than expected.

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By Tami Luhby, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- Unlike many of its peers in the financial services industry, JPMorgan Chase & Co. on Wednesday turned in a better quarterly performance than analysts had expected. Still, earnings dropped 50% from a year earlier.

The bank reported first-quarter net income of $2.4 billion, or 68 cents a share, on $16.9 billion of revenue. The results included a $2.6 billion writedown on its loan portfolio.

A year earlier, JPMorgan (JPM, Fortune 500) posted a record performance with net income coming in at $4.8 billion, or $1.34 a share, and revenue at almost $19 billion.

This quarter's results topped analysts' consensus estimates of 64 cents per share on $2.1 billion in income, according to Thomson Financial/First Call. The bank narrowly missed revenue estimates of $17 billion.

"Our earnings this quarter were down significantly as market conditions and the credit environment remained challenging," said Chief Executive Officer Jamie Dimon in a statement. "However, the firm as a whole maintained solid business momentum and our capital position remained strong."

JPMorgan's shares were up 4.4% to $43.97 in midday trading.

As this year has progressed, analysts have become increasingly concerned about JPMorgan's performance, lowering their estimates for the first quarter from $1.12 per share at the start of 2008. They have pointed to JPMorgan's large leveraged loan portfolio and rapidly weakening home-equity loan holdings as its Achilles heels. The company has said it would need to build up its loan loss reserves this quarter to compensate.

The bank added $2.5 billion to its allowance for credit losses, which now total $12.6 billion. It has a 8.3% Tier 1 capital ratio, which measures the bank's fiscal strength. A bank with a ratio of 6% or more is considered to be well-capitalized.

In the home equity arena, the bank saw its net charge-off rate, measuring loans that have gone bad, jump to 1.89% from 1.05% the previous quarter. It had $447 million in bad loans in the most recent quarter and expects the number could double by year's end.

Also of concern is the growing losses in prime mortgages. Even if borrowers have good credit, they may walk away from their mortgages if their homes' values fall below the loan amount. JPMorgan's net charge-off rate in this sector rose to 0.48%, or $50 million, up from 0.18%, or $17 million, in the prior quarter.

"All in all, the underlying banking business is growing at JPMorgan, but the yoke of the lending spree of prior years - of which JPMorgan was not a leading contributor - is continuing to force the bank and its peers to increase credit reserves and ratchet up additional writedowns associated with home loans and home loan related securities," said Walter O'Haire, senior analyst with Celent, a Boston-based financial research and consulting firm. "It appears that in the near term, the end of this burden is not in sight."

Still, JPMorgan has fared better than its rivals on Wall Street. And it's had a busy quarter.

Last month, the federal government turned to JPMorgan when Bear Stearns Cos. (BSC, Fortune 500) was crumbling. As Bear suffered a run on the bank, JPMorgan stepped in first to provide funding and then to purchase the faltering institution with government backing. It is paying about $10 a share for the storied investment bank, but must now contend with integrating Bear Stearns' business, which Friday reported net income fell 79% in its fiscal first quarter.

The deal is expected to close June 30, but executives said they plan to update employees about their future prospects in coming weeks. There are expected to be layoffs on both sides, but JPMorgan has put a hiring freeze in effect in New York City and is cutting back on consultants and temporary workers in order to bring on as many Bear Stearns employees as possible, they said.

JPMorgan also made a $7 billion bid for struggling Washington Mutual (WM, Fortune 500), which last week announced it was turning to private-equity firm TPG instead.

And, it made out like a bandit in Visa (V)'s massive IPO last month, making $1.5 billion on its stake in the credit card processor.

Bank executives said in a conference call with reporters that they see opportunities to grow their business and do not plan to shrink their assets, as some of their capital-squeezed competitors are doing. Unlike many of them, JPMorgan has not had to search for a capital infusion.

As a sign of its strength, executives pointed to the fact that the bank's retail financial services division grew revenue by 15% and assets under management rose 13%. They expect the Bear Stearns acquisition to add up to $1.5 billion in earnings over time.

It wouldn't be surprising if JPMorgan steps up to scoop up more competitors, said Frank Barkocy, director of research at Mendon Capital Advisors Corp.

"They are going to be opportunistic," Barkocy said. "If it's a good fit at the right price, they will take advantage of it."

To be sure, JPMorgan has felt the effects of the liquidity crunch. The bank missed analysts' estimates last quarter, coming in at 86 cents a share rather than the expected 93 cents per share. Net income fell 34% to $3 billion, while revenue rose 7% to $17.4 billion. It took a $1.3 billion writedown after its subprime-related securities lost value.

But the performance far exceeded that of chief rival Citigroup Inc. (C, Fortune 500). That bank, which posted a record $9.8 billion loss and took a $18.1 billion writedown in January, reports first-quarter results Friday and is expected to take another big hit.

Earlier this week, Wachovia Corp. (WB, Fortune 500) surprised Wall Street with a first-quarter loss of $350 million, or 20 cents a share, while Washington Mutual reported a loss of $1.1 billion, or $1.40 a share.

Also Wednesday, Wells Fargo & Co. (WFC, Fortune 500) reported earnings of 60 cents a share on $2 billion of income and and record revenues of $10.6 billion. Earnings fell 11% from a year earlier, but beat analyst estimates.

Looking ahead, Dimon said the rest of the year will remain challenging as the economy remains weak and the capital markets stressed.

"These factors have affected, and are likely to continue to negatively impact, our firm's credit losses, overall business volumes and earnings - possibly through the remainder of the year, or longer," he said.

But like some of his peers, Dimon also believes Wall Street is over the worst of the credit crunch.

"That side is working itself out," he said to reporters. "In my opinion, it will be fully worked out by the end of this year." To top of page

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