JPMorgan makes Wall Street smile

The giant banking company's earnings fall, but manage to surpass expectations - so the stock jumps.

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By Aaron Smith, staff writer

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NEW YORK ( -- JPMorgan Chase said Thursday that profit plunged in the second quarter, stung by $1.1 billion in writedowns, but the firm still managed to beat Wall Street projections.

JPMorgan (JPM, Fortune 500) shares jumped 10% in early trading. Other banking firms - including Citigroup (C, Fortune 500), Merrill Lynch (MER, Fortune 500), Wells Fargo (WFC, Fortune 500) and Bank of America (BAC, Fortune 500) - also posted strong stock gains.

The New York-based bank reported net income of $2 billion in the second quarter, a 53% drop from $4.2 billion in the second quarter. The firm said earnings on a per-share basis fell 55% to 54 cents from $1.20 in the year-earlier period.

Analysts had expected a 64% decline in earnings per share to 44 cents, according to a consensus provided by Thomson/FirstCall.

But without a $540 million net loss stemming from its acquisition of Bear Stearns - which closed in May - net income would have been $2.5 billion, the company said.

"[JPMorgan] earnings are significantly better than what analysts have been looking for because the negative hysteria, panic, fear - whatever you want to call it that hit these stocks - made no sense whatsoever," said Richard Bove, analyst for Ladenburg Thalmann.

Bove said that financial firms tend to be multi-faceted, which allows them to compensate for the weak portions of their business with the stronger performing sections.

The firm reported $19.7 billion in second-quarter net revenue, a 1% decline from a year earlier. That beat the $16.5 billion projected by analysts surveyed by Thomson/FirstCall.

"Our earnings were down significantly due to the unfavorable credit environment and market conditions," CEO Jamie Dimon said in a statement.

JPMorgan bought Bear Stearns on May 29 for $2.2 billion, or $10 a share. The deal allows JPMorgan to expand its financial footprint, though it also has has to clean up the mess from its imploded acquisition.

Housing hit Dimon said the plummet in investment bank net income, to $400 million in the second quarter from $1.2 billion a year ago, was partly due to mortgage-related investments.

He blamed the drop in profit in retail financial services on higher charges to the home lending portfolio. Profit in that division fell to $600 million from $785 million a year ago.

"However, the firm overall continued to maintain solid underlying business momentum," Dimon said, noting that some other areas of the company performed well.

Commercial banking net income grew to $355 million in the quarter, up from less than $300 million a year earlier.

Despite the decline in earnings, and drop in share price - JPMorgan (JPM, Fortune 500) stock has plunged 29% so far this year without counting Thursday's gains - the firm is considered one of the stronger companies in the banking industry.

As the year has progressed, analysts have become increasingly concerned about JPMorgan's performance, particularly in its large leveraged loan portfolio and rapidly weakening home-equity loan holdings.

But the firm's troubles seem manageable compared to other participants in the devastated industry, such as Citigroup (C, Fortune 500) and Merrill Lynch (MER, Fortune 500).

"I think we're executing quite well," Michael Cavanagh, chief financial officer, said during a call with journalists. "The conditions continue to be choppy. A lot of stuff is resolving itself and working itself through."

"At a point, it will stabilize, but I would be cautious for the near term," he added.

Bank sector woes Both large and small financial institutions that bet big on the mortgage industry continue to be plagued by ongoing deterioration in the housing market. Now with signs that the economy is weakening further, analysts are paying particularly close attention to banks' credit card and auto loan portfolios for signs of rising delinquencies.

JPMorgan said its auto loan net profit slipped 2% on a year-over-year basis to $83 million. The firm's credit card net profit plunged 67% to $250 million.

JPMorgan's results come at the start of what is expected to be a particularly difficult second-quarter bank reporting period.

Despite Wednesday's better-than-expected numbers from Wells Fargo (WFC, Fortune 500), both Merrill Lynch and Citigroup are expected to book losses for the quarter. Merrill is due to report earnings after the market close Thursday. Citigroup's results are slated for release early Friday.

Wachovia (WB, Fortune 500), which reports on July 22, warned last week that it expects to lose between $2.6 billion and $2.8 billion during the second quarter. Profits for Bank of America (BAC, Fortune 500), due out on July 21, are expected to be less than half of what they were just a year ago.

Bove, the analyst, does not own banking stocks and his firm does not conduct business with them. To top of page

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