JPMorgan Chase & Co.'s first-quarter profit wasn't as good as last year's, but it told investors what they wanted to hear: Banking is not dead.
JPMorgan became the third big bank in a week to release upbeat earnings news, reporting Thursday that it earned $2.14 billion for the January-March period, thanks to both strong trading activity and banking to consumers. The company's performance added to the evidence that the financial industry is starting to recover from the devastating losses caused by the credit crisis and the recession, even as banks still contend with rising loan defaults.
The bank's chief executive also said that it could pay back its $25 billion in government funding immediately, and that it has no intention of using the government's Public-Private Investment Program to sell so-called "toxic assets" such as mortgage-backed securities.
"Folks, it's become a scarlet letter," CEO Jamie Dimon said of government funding. Banks that have accepted federal bailout funds are now subject to greater government scrutiny and limits on how much they pay their top executives.
JPMorgan said it's benefiting from growth in deposits, a rise in mortgage refinancings and low interest rates that allow it to borrow cheaply and then charge customers more for loans. The company followed Wells Fargo & Co. and Goldman Sachs Group Inc. in reporting that earnings improved during the January-March period.
"The results are quite strong in a very challenging environment," said Tom Kersting, a banking analyst at Edward Jones.
Last week, Wells Fargo & Co. surprised investors by announcing a record $3 billion quarterly profit. Goldman, meanwhile, on Monday said it earned $1.66 billion during the first three months of the year.
Investors bid up many financial stocks after JPMorgan reported its earnings. Kersting said, however, that investors remain cautious about the banking industry while they await the results of the government's "stress tests" on 19 big banks that have received federal bailout funds. The stress tests are to determine if the banks will need any additional capital based on various economic scenarios.
Wall Street is also waiting for first-quarter results from Citigroup Inc. and Bank of America Corp., seen as the weakest of the big banking companies. Those two banks are likely to post better results than last quarter, Kersting said, "but not as strong as what we've seen out of Wells or JPMorgan."
Like Goldman, JPMorgan pulled in record revenue in the quarter from buying and selling bonds. Not only did JPMorgan profit from the wider interest rate spreads, but it also gained market share from its purchase of Bear Stearns and took advantage of historically high issuance in the bond market.
"January, February and March were some of the biggest bond months ever," Dimon said in a conference call.
JPMorgan's revenue from the fixed-income markets was a record $4.9 billion, and helped push the entire investment bank division to record revenue of $8.3 billion and a record profit of $1.6 billion.
However, Dimon added that fixed-income activity is likely to taper off — which means that the investment bank might not be able to pull off another record performance for some time. Bond issues and trading thrived the first two months of this year as the market recovered from the credit freeze at the end of 2008.
"It's not reasonable to expect it to continue at that level," Dimon said.
JPMorgan also said loan defaults are increasing, an indication that the recession will remain a drag on profits. The company's credit costs amounted to $10 billion — that's $6 billion from loan losses, and $4 billion to build up reserves.
Although the company anticipates losses will keep rising in credit cards, home equity loans, mortgages and commercial real estate loans, it believes it can handle them. It has $28 billion in reserves, which covers 4.5 percent of the company's loans.
Bank analysts said it makes sense that JPMorgan would at least hesitate before participating in the government's program to encourage private investors to buy banks' assets.
"They don't know what the prices are going to be. In a down market, the only people who would sell into that are the people that need capital badly," said Bart Narter, senior analyst at Celent.
In holding on to its assets, JPMorgan is essentially betting on the economy turning around, said Aite Group bank analyst Alois Pirker. If the economy rebounds, JPMorgan's assets should, too, Pirker said. But if it worsens significantly, those asset prices will likely drop further.
Even though JPMorgan's investment bank posted a record first-quarter profit, it had to mark down its portfolio of leveraged loans by $711 million and its mortgage-related exposures by $214 million.
JPMorgan earned $2.14 billion, or 40 cents per share, on record revenue of $25.03 billion in the first quarter. It earned $2.37 billion, or 67 cents per share, on revenue of $16.89 billion a year earlier.
Analysts predicted a profit of 32 cents per share, according to Thomson Reuters.
The company's stock rose $1, or 3 percent, to $33.56 Thursday afternoon. Meanwhile, Citigroup, scheduled to report its earnings on Friday, rose 11 cents, or 2.8 percent, to $4.08, and Bank of America, expected to report on Monday, rose 27 cents, or 2.6 percent, to $10.71.
Unlike Citigroup, Bank of America, Wells Fargo, Goldman and Morgan Stanley, JPMorgan has managed to avoid posting a quarterly loss since the financial crisis began.
JPMorgan said it extended $150 billion in new credit during the first quarter.
Its retail banking unit earned $474 million, compared with last year's loss of $311 million. That business was helped by last year's acquisition of the thrift Washington Mutual Inc. Average total deposits rose 62 percent to $345.8 billion from a year ago, and 2 percent from the fourth quarter of 2008.
The WaMu acquisition also helped drive JPMorgan's commercial banking unit's income up 16 percent to $338 million.
JPMorgan's credit card division, however, did poorly because of surging defaults that have afflicted all credit card issuers. It posted a loss of $547 million compared with a profit of $609 million last year.
Asset management, Treasury and securities services, and the corporate lending unit also did worse in the first quarter than in the same period last year.
JPMorgan's stock is up about 3 percent for the year, but still down 39 percent from its 2007 peak.
JPMorgan is one of several bailout recipients, including Wells Fargo, Morgan Stanley and Goldman Sachs, expressing interest in repaying their government bailout money soon. JPMorgan got $25 billion from the government late last year to keep the financial system stable and increase lending.
Dimon repeated that he hopes to repay the government as soon as possible, and that he is "waiting for guidance from the government."
He said the bank would be able to raise capital on its own, and do just as much lending without the federal funds.