updated 10/14/2009 3:46:20 PM ET 2009-10-14T19:46:20

JPMorgan Chase & Co. reported strong third-quarter earnings Wednesday as its thriving investment banking business more than offset rising loan losses that the bank warned would continue for the foreseeable future.

JPMorgan, the first of the big banks to report earnings for the July-September period, reported a $3.59 billion profit but also said it roughly doubled the amount of money it set aside for failed home and credit card loans in the quarter.

The bank's stock rose on the news, helping to lift the overall market and send the Dow Jones industrials above 10,000 for the first time in a year. Still, JPMorgan's performance shouldn't be taken as a forecast for how well other banks did during the quarter. Many financial companies don't have such big investment banking operations, which includes trading of stocks and bonds and allowed JPMorgan, the nation's largest bank by assets, to overcome its loan losses.

Bart Narter, a senior vice president at consulting firm Celent, said JPMorgan's results showed a clear trend that "Wall Street is picking up quite smartly, while Main Street continues to suffer."

Banks including JPMorgan have predicted for some time that their loan losses would keep rising. And in JPMorgan's earnings statement, CEO Jamie Dimon confirmed that this trend continues.

"Credit costs remain high and are expected to stay elevated for the foreseeable future in the consumer lending and card services loan portfolios," Dimon said.

In its earnings statement, the bank also described the economy's near-term path as uncertain.

The company said for the second straight quarter there are some signs of stabilization in delinquencies among consumer loans that are only recently past due. But Chief Financial Officer Mike Cavanagh said during a conference call with reporters the bank "can't at the moment be certain" that the trend will continue.

JPMorgan may be able to raise its 5 cent per share quarterly dividend to as much as 25 cents if loan losses stabilize and the company's credit costs fall, Cavanagh said. The CFO said an increase could come early next year, but he again cautioned that's it too soon to know if the economy will recover enough to make a higher dividend possible.

Investors didn't seem troubled by the bank's dim credit outlook, and likely were more focused on the fact that big profits in divisions such as investment banking helped the New York-based bank earn 82 cents per share during the third quarter. Analysts forecast a profit of 52 cents per share.

JPMorgan said its investment bank net income came to $1.92 billion, up $1 billion from a year earlier as fixed income trading thrived.

JPMorgan has been considered one of the strongest financial companies during the past year's turmoil. It has performed better than other large competitors in part because of its relatively light exposure to troubled subprime mortgages and commercial real estate. It was also among the first banks to repay government bailout money. On June 17, JPMorgan gave back all of the $25 billion it had received at the height of the credit crisis in 2008.

Its relatively stronger foundation than its competitors, which report results in the coming days, helped set JPMorgan up for a quarter that is likely to be among the best in the industry, analysts said. Citigroup Inc. and Bank of America Corp. are also scheduled to report earnings this week, followed by many other banks over the next two weeks.

"It's harder to come out when you're eight feet deep than when you're two," said Denise Valentine, a senior analyst at financial consulting firm Aite Group.

Still, the company is far from immune to the industry's problems. Traditional residential mortgages and home equity loans as well as credit cards continue to default at a rapid pace and that has eaten into JPMorgan's profits.

JPMorgan's loss provision to cover current and future home loan defaults jumped to $3.99 billion, while its provision for credit card losses surged to $4.97 billion.

Eric Schopf, a vice president at Hardesty Capital Management, said JPMorgan's aggressive additions to loan loss reserves throughout the downturn have also given it a leg up on the competition, which has lagged in adding to reserves.

Indeed, Cavanagh said that if the economy continues to recover and doesn't falter again, JPMorgan is probably close to reaching its peak loan-loss reserve levels.

Credit card defaults and mortgage losses are likely to continue rising and lag an overall economic recovery. Losses on credit cards typically mirror unemployment, which rose to 9.8 percent in September and which is expected to pass 10 percent in the coming months.

JPMorgan said the percentage of credit card loans it wrote off as not being repayable in the third quarter reached 10.3 percent of its total portfolio. Cavanagh said during a separate call with analysts that the card loss rate is expected to reach 10.5 percent in the first half of 2010 and could go higher depending on the unemployment rate.

Loan losses were also pushed higher by weakness in the portfolios JPMorgan acquired when it purchased the failed bank Washington Mutual Inc. a year ago.

Jeff Markunas, lead portfolio manager of the RidgeWorth Large Cap Core Equity Fund, said the severe weakness in the credit card portfolio could lower expectations for similar divisions at the banks reporting later in the week, while JPMorgan's strong investment banking profits could raise hopes for profits in the same divisions at competitors going forward.

Fixed income markets accounted for two-thirds of the investment bank's $7.51 billion in revenue. While the company's trading operations were strong, JPMorgan was also able to write up the value of some investments that have started to recover after souring during the peak of the credit crisis.

JPMorgan's fixed-income trading got a boost from investors still uneasiness about their own financial situations. Investors continue to flock to the relative safety of bonds, strengthening that market.

"The good thing at JPMorgan is you have a lot of different profit levers," Schopf said. "The diversity works to their advantage."

With credit quality still likely to be a problem into 2010, Markunas said the key is: "can they keep (investment) banking humming? The conditions are favorable, so they should."

Overall, JPMorgan generated $28.78 billion in revenue during the quarter, better than the $24.96 billion predicted by analysts.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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