JPMorgan: Profit decline, $1.3B writedown

Profits at Wall Street firm fall short of estimates as the firm takes $1.3 billion hit related to subprime exposure.

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By David Ellis, staff writer

JPMorgan Chase expressed caution as the company entered 2008, but said it remained well-positioned even if the economy tips into a recession.
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NEW YORK ( -- JPMorgan Chase & Co., the second bank this week to post dismal results, reported a decline in quarterly earnings Wednesday after suffering a $1.3 billion subprime-related hit.

The company said net income fell 34 percent to $3 billion, or 86 cents a share, during the fourth quarter. The company earned $4.5 billion, or $1.09 a share, in the same period last year.

JPMorgan Chase was expected to earn 93 cents a share for the quarter ended in December, according to analysts surveyed by earnings tracker Thomson Financial.

Revenue rose 7 percent to $17.4 billion from $16.2 billion in the year-earlier period, beating estimates of $17.05 billion.

Shares of JPMorgan Chase (JPM, Fortune 500) rose 4 percent in midday trading on the results.

"I thought the numbers were quite respectable given the pressure in the industry," said Nancy Bush, managing member at NAB Research LLC in Aiken, S.C.

The company also reported a $1.3 billion writedown in the company's investment banking arm, due to the decline in value of its subprime holdings, which include complex instruments known as collateralized debt obligations.

Chairman and Chief Executive Jamie Dimon said this segment of the business, which saw its profits plunge 88 percent in the quarter to $124 million from $1.01 billion a year ago, faces continuing uncertainty.

JPMorgan has weathered tightening credit conditions better than rivals Merrill Lynch (MER, Fortune 500) and Citigroup (C, Fortune 500), which posted a record $9.8 billion fourth-quarter loss Tuesday and took a giant $18.1 billion write-down.

Last quarter, JPMorgan reported a rise in profit, beating Wall Street estimates, even as its investment banking business was hurt by turmoil in the global credit markets.

Dimon added that he remained "cautious" as the firm entered 2008 warning that the health of the economy remained a risk.

JPMorgan built up its loan loss reserves by $1.1 billion during the quarter to prepare for such an instance, particularly in the company's consumer credit businesses like credit cards and auto loans.

"We are not predicting a recession but we are prepared in almost every way possible," Dimon told analysts during a conference call.

Other divisions of JPMorgan, however, showed some signs of growth including the company's asset management, treasury and securities services and commercial banking businesses, which reported double digit profit increases.

JPMorgan also said it remained well capitalized. Some of its rivals have looked to primarily foreign investors for help.

The company said its so-called tier 1 capital ratio - a key measure of its ability to absorb losses - stood at 8.4 percent at the end of the year, unchanged from the previous quarter but down slightly from a year ago.

Even with the housing market continuing to deteriorate, Dimon stressed during a conference call with analysts that he wanted to grow the company's mortgage business. Dimon said he hoped to do that through organic growth.

But he said the company was "very open minded" to making acquisitions in the future given that the financial services landscape is littered with distressed companies.

Last week, rival Bank of America (BAC, Fortune 500) made such a move by acquiring embattled mortgage lender Countrywide (CFC, Fortune 500) for $4 billion in an all-stock transaction.

Speculation has surfaced recently that JPMorgan might attempt to buy the Seattle-based Washington Mutual, which has been hard hit by woes in the housing market.

Nancy Bush of NAB Research said that a move by JPMorgan to buy WaMu, or any other troubled bank for that matter, is unlikely unless there is a significant reduction in their value or encouragement by federal regulators.

"There are a lot of companies out there they would love to do that are not really available," said Bush.

Elsewhere in the financial sector, Wells Fargo reported a 38 percent decline in net income Wednesday. Merrill Lynch and Washington Mutual (WM, Fortune 500) are slated to post results Thursday. To top of page

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