JPMorgan earnings: Less than meets the eye

JPM beats expectations but only after releasing its loan-loss reserves.

By Jim J. Jubak Jul 15, 2010 5:22PM

Jim JubakSo far, so good for bank stocks.

Thursday, JPMorgan Chase (JPM) reported second-quarter earnings of $1.09 a share. Not only was that a 289% increase from the second quarter of 2009, but it beat Wall Street projections for a 159% jump in earnings and earnings of 73 cents a share.

Some people, including me, had worried that Wall Street’s expectations for bank earnings had gotten way ahead of themselves and that banks would be unlikely to meet those projections. (For more on that worry, see my July 7 post, Watch for a buying opportunity on my watch-list banks if earnings disappoint this quarter.)

You can take that worry off your list.

But that’s not to say that Wall Street hasn’t found something to fret about in these numbers -- a banking-specific version of the stock market’s general worry about economic growth.

The surge in earnings, bank analysts pointed out this morning, is due to a big reduction in provisions against loan losses. 

JPM cut loan-loss provisions in its retail banking unit by $2 billion in the quarter. In the credit card business, a problem area during the recession, the bank cut loan-loss provisions by $2.4 billion. That helped the credit card business earn $343 million against a loss of $672 million in the second quarter of 2009.

The release of loan-loss reserves added 36 cents a share to earnings. Without that release, earnings of $1.09 a share were just 73 cents a share -- exactly at analyst estimates. 

That’s fine if the bank has pegged the turn in the credit markets correctly. But if the economy is weaker than expected, these reductions won’t be repeated in future quarters and might even need to be reversed.

You can find ready numbers to support that worry. Many of the bank’s businesses didn’t do all that well. As expected, revenue from fixed-income fell for the quarter to $3.6 billion, from $4.9 billion in the second quarter of 2009. Net income from investment banking fell by 6% from the second quarter of 2009.

JPMorgan Chase was extremely cautious in its conference call, saying it expected home prices to continue to decline “a little bit more” and refusing to put a date on when the bank might begin to raise its current 20 cents a share dividend towards pre-financial crisis levels.

These things helped mute the response to the earnings surprise. The shares closed at $40.61, just 26 cents a share above the previous close.

At the time of this writing, Jim Jubak owned shares of JPMorgan Chase Preferred in his personal portfolio.

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