JPM Investment Banking Gains Offset Retail Issues

By Rieker, Matthias | American Banker, April 19, 2007 | Go to article overview

JPM Investment Banking Gains Offset Retail Issues


Rieker, Matthias, American Banker


JPMorgan Chase & Co.'s profit report showed that even though its retail banking operation is confronting challenges much like those faced by the rest of the industry, its investment banking and trading operations are more than making up for it.

The $1.4 billion-asset New York company said first-quarter net income rose 55% from a year earlier, to a record $4.8 billion, and revenue grew in five of its six business lines, the lone exception being credit cards. Investment banking generated the largest part of the earnings by a wide margin.

Asset management results and private-equity gains were also strong, and middle-market business contributed to a rise in commercial banking revenue. Retail banking posted a smaller revenue gain, and credit cards were flat. Those two businesses were hurt by increases in loan-loss provisions.

Michael J. Cavanagh, JPMorgan Chase's chief financial officer, said it believes it has corralled the volatility that had marked its income from trading activity. He also spoke optimistically about several trends in its retail business.

In conference calls Wednesday, Mr. Cavanagh said that he was "very proud" of the performance. "It's very nice to put up results that I would say stack up great with any other we have seen so far."

He said he remained confident about consumer credit quality in general, despite the increases to provisions. "The American consumer is in a strong position."

More than anything else, the reserve increases are a return to normal levels from their lows following bankruptcy reform, Mr. Cavanagh said.

Also, JPMorgan Chase is making progress in branch banking, he said.

"The real driver underneath it all is ... higher home equity loan balances and deposit balances and strength in deposit fees and other fees coming out of the branches," Mr. Cavanagh said. "Offset to that ... is really continued pressure on deposit margin."

Overall revenue rose 25%, to $19.7 billion. Income from investment banking rose 81%, to $1.5 billion, while earnings from retail banking fell 2%, to $859 million. Card earnings slipped 15%, to $765 million, including a 21% increase in that line's loan-loss provision, to $1.2 billion.

Mortgage banking income more than doubled, to $84 million, benefiting from strong gains on the sale of loans and accounting adjustments related to the fair value of loans. But earnings from branch banking fell 9%, to $690 million, because fee revenue declined and the provision for loan losses more than tripled, to $233 million. The retail results also were lowered by the sale of the insurance business last year.

Income from commercial banking rose 27% from a year earlier and 19% from the fourth quarter, to $304 million. …

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