Not Much Bad News for JP Morgan

10/14/2009 2:37 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

There were no big negative surprises from JPMorgan Chase (NYSE: JPM). That was the good news when, on the morning of October 14, JPMorgan Chase reported third quarter earnings of 82 cents a share, way above the 50 cents a share expected by Wall Street analysts.

A nice positive surprise at that.

The company also told investors it had added another $2 billion to its reserves against losses in its credit card business. That brings total credit reserves at JPM Chase to $31.5 billion. Wall Street had been expecting that JPM Chase would add $1.4 billion or so to reserves.

Not the huge negative surprise that some on Wall Street feared.

The combination of better-than-expected earnings and only modestly worse-than-expected additions to reserves sent the stock up as soon as the market opened.

The bank still obviously has problems in its consumer lending business. Credit cards saw a loss on higher charge-offs. The bank projected that losses in its home equity loan business, its prime mortgage business, and its subprime mortgage business are trending to a quarterly rate of loss of $1.4 billion, $600 million, and $500 million over the next few quarters.

The retail banking unit isn't generating much in the way of income, either, with total net of just $7 million for the quarter compared to net income of $57 million in the third quarter of 2008.

But the investment banking side of the company more than compensated. Revenue from fixed income investment banking jumped to a record $5 billion in the quarter.

That jump was helped along by the recovery in the value of assets in the bank's fixed income portfolio. In the third quarter of 2008, the bank marked its portfolio down by $3.6 billion.

In total, the investment banking unit produced a $1.9 billion profit, or more than half the bank's total for the quarter.

According to Bloomberg, JPMorgan Chase, after buying Bear Stearns in 2008, is now the world's biggest underwriter of stock, hybrid, and debt securities.

Investors curious about how badly the commercial mortgage meltdown will damage banks will have to wait for earnings reports from the regional and local banks with the biggest exposure to that market. (See my October 8th post for more on the extent of the problem and which bank stocks to watch.)

JPMorgan Chase has a relatively tiny exposure to commercial real estate. Revenue from real estate banking came to just $121 million in the third quarter. That's a drop in the bucket against the bank's total $28.8 billion in revenue.

Oh, and for those tracking how much banks are paying out in bonuses this year, JPMorgan Chase announced that its investment banking unit had set aside $8.8 billion for compensation. That's about 40% of revenue. And it's up from the $6.5 billion set aside in the same period in 2008 when 52% of revenue went to compensation.

JP Morgan Chase has a good presentation of the details of its quarter here.

Full disclosure: Jim Jubak does not own or control shares of any company mentioned in this post.

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