updated 7/16/2009 5:33:35 PM ET 2009-07-16T21:33:35

The banking industry has another winner.

JPMorgan Chase & Co. reported a 36 percent jump in second quarter profits Thursday, easily surpassing analysts’ forecasts as huge gains in its investment banking business outweighed higher losses from bad loans.

The results came two days after rival Goldman Sachs Group Inc. also posted surprisingly good results, solidifying the companies’ position as the strongest players in the industry. Many other banks are still struggling to emerge from the worst of a credit crisis that peaked last fall as well as a recession that has sent loan defaults higher.

“Both JPMorgan and Goldman Sachs were well positioned going into the crisis, and they are going to continue to pull ahead and dominate the sector,” said Len Blum, managing partner at investment bank Westwood Capital.

JPMorgan and Goldman are among the 10 major banks that federal regulators deemed healthy enough last month to repay billions in bailout funds, freeing them from tighter government oversight and caps on pay that the industry had chafed at. Two major banks that haven’t yet exited the rescue program, Bank of America Corp. and Citigroup Inc., report their earnings on Friday.

JPMorgan earned $2.72 billion for the April-June period, up from $2 billion a year ago. Investment banking profits more than tripled to $1.5 billion on higher underwriting fees and gains in its bonds business, though some analysts said that was an unusual bump and unlikely to be sustained.

Like Goldman Sachs, JPMorgan is also seeing its investment banking business benefit from a smaller playing field. JPMorgan bought Bear Stearns Cos. at a fire sale price last year when the firm was on the brink of collapse, and Lehman Brothers later declared bankruptcy — both of them felled by risky loans related to real estate.

At the same time, JPMorgan also reported higher losses in consumer lending and credit cards. The bank said it set aside $9.7 billion for credit losses in the quarter, up from $4.29 billion a year earlier. It also set aside another $2 billion to cover future losses, bringing its total loss reserves to more than $30 billion.

JPMorgan executives were cautious about the consumer lending business in a conference call with investors and analysts, noting the ongoing uncertainty about the economy.

The bank’s chief financial officer, Mike Cavanaugh said that “in the near term, meaning this year and next, it’s going to be hard to see how we turn a profit in the (credit) card business.”

JPMorgan’s credit card services division posted a $672 million loss in the quarter, compared with a year-earlier profit of $250 million, as more cardholders default. Revenues also fell with the introduction of new rules designed to protect consumers.

Credit card issuers have been hit not only by delinquencies but also by lower consumer spending. Also, JPMorgan executives said, it’s not yet known how credit card legislation that recently became law will affect profits in the card business.

JPMorgan executives said on the conference call that they’re seeing some stabilizing in the delinquency rate in consumer loans including mortgages, home equity and credit cards, although the amount of loan losses is expected to rise in the near term.

CEO Jamie Dimon said the bank won’t need additional reserves once the loan environment stabilizes, but that the timing remains uncertain. “That could be as early as next quarter, that could be sometime next year,” he said.

Despite the gains in investment banking, some analysts were pessimistic about the outlook for the company’s core consumer banking business. Richard Bove of Rochdale Research said loans and deposits both fell, as did profit margins, making it a “very bad quarter,” Bove wrote in a note to clients.

“Capital gains are the reason for the strong revenue and earnings performance and these are not sustainable,” Bove said.

Even with credit losses remaining high for now, Gary Townsend, president of private investment group Hill-Townsend Capital Inc., said JPMorgan’s results were likely to be lifted by an improving economy.

“The offset is going to be ... a resumption of economic growth and with that an abatement of the level of unemployment and better income growth and eventually consumption,” Townsend said. “We move forward.”

JPMorgan’s retail financial services posted a $15 million profit after setting aside more money as mortgage losses balloon, compared with a profit of $503 million in the period a year earlier.

The profits came despite a $1.1 billion charge, or 27 cents a share, as JPMorgan repaid $25 billion in loans it received from the government as part of the Troubled Asset Relief Program. The bank was also hit by a 10-cents-a-share FDIC special assessment penalty.

Earnings per share fell to 28 cents from 53 cents as the company had more stock outstanding than a year ago. Analysts surveyed by Thomson Reuters had forecast earnings of 4 cents per share on revenue of $25.89 billion.

Despite the higher earnings, JPMorgan’s shares fell 13 cents, or 0.4 percent, to close at $36.13. Financial shares were broadly lower as a major lender to small businesses, CIT Group Inc., teetered on the edge of bankruptcy after talks with regulators about a rescue broke down late Wednesday.

Dimon said JPMorgan has no material exposure to CIT.

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