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Even JPMorgan Chase is still putting new money away to cover bad loans

posted on January 15, 2010 at 11:40 am
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Can’t anybody run a bank anymore?

I don’t mean an investment bank that makes its money from trading, managing stock and bond offerings, and inventing new financial instruments. That’s a good business these days for everybody from Bank of America (BAC) to JPMorgan Chase (JPM). (At Goldman Sachs (GS) it’s a great business.)

I mean a bank that takes deposits and makes loans through such bread and butter products as mortgages and credit cards.

JPMorgan Chase is one of the best in the business at that business. But even that bank, it admitted in its fourth quarter 2009 earnings report issued this morning (January 15) , just keeps generating losses in its traditional banking businesses.

Investors who were hoping to see signs that the end of trouble in retail and commercial banking was near have sent shares down 2.3% this morning (as of 11 a.m. in New York).

Here’s the problem in JPMorgan Chase’s earnings.

The top line number looks great. Fourth quarter earnings of 74 cents a share or $3.3 billion, were 13 cents a share better than Wall Street had expected and way above the 6 cents a share and $702 million the bank reported in the fourth quarter of 2008. Revenue climbed 32% from the fourth quarter of 2008 to $25.2 billion although they still came in below Wall Street’s projected $26.8 billion.

But more than half of that profit came from the company’s investment banking business, which posted net income of $1.9 billion for the quarter. Fixed income trading contributed another $2.7 billion to net income.

And the bank’s traditional banking businesses?

Well, income in the commercial banking unit—the one that makes loans to businesses—fell to $244 million in the quarter (from $480 million in the fourth quarter of 2008) as the bank boosted reserves for losses by another $304 million on continued weakness in commercial real estate. (Watch out regional and local banks! Smaller banks have a much higher percentage of their portfolios locked up in commercial real estate loans than a money center bank like JPMorgan Chase does.)

And the consumer bank turned in another terrible quarter with a $399 million loss. The retail banking part of the consumer banking unit posted a $1 billion profit but that was more than offset by a $1.4 billion loss from consumer loans. The credit card division alone lost $306 million in the quarter.

The net-charge-off rate on credit cards for bad debt fell to 9.3% in the quarter from 10.3% in the third quarter of 2009, it’s true, but that still left the rate well above the 5.6% charge-off level of the fourth quarter of 2008. And JPMorgan Chase’s CFO really disappointed investors and analysts when on the company’s conference call he noted that he couldn’t say that the bank has reached the peak of the reserves it must put aside for bad debt.

This much bad news from the strongest of the big banks (I don’t call Goldman Sachs a bank no matter what the paper work at the Federal Reserve says) doesn’t bode well for next week’s earnings reports from Citigroup (C) on January 19, Bank of America on January 20, and Wells Fargo (WFC) on January 20.

And with the stock market as a whole dependent on the financial sector for leadership in recent days, next week could be a volatile one of stocks in general.

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  • twoyrfixed on 15 January 2010

    I hesitate to comment too strongly as you’ve forgotten more about investing than I’ll ever know. When it comes to lending, the tables might be turned. In the Subprime/under $500k space, it’s true, clean up progress has been made. For HELOCS/2nds (Chase) and Alt A (WAMU), we haven’t scratched the surface. Chase (IMHO the best of the big banks along with USB as far as RE lending goes) will be kicking this (2007 RE implosion) can down the road for a looooooooong time.

    You can figure out what that means for Citi and BofA.

    Thanks for all your help over the years!!!

  • doydum on 15 January 2010

    You know guys, you always complain about the government, the politicians, etc, etc…
    How about this, from one of the best companies in America?… Please read:

  • Droverjoe on 15 January 2010

    I’m retired. Banks do not pay any interest on savings/ CD’s unless you’re willing to lock in for 5 years. I don’t trust them or our government at all. So I just use the checking account and park my money else where.
    This is a Top Down recovery and from my view point it might not take hold. It should be a Bottom Up recovery instead. Then there would be a chance of the recovery becoming a real recovery everyone could believe in. Washington and the Banker’s can’t see this or even understand the concept.
    Thanks Jim, Keep up the great work.

  • lotteollie on 15 January 2010

    You are obviously upset because you didn’t like the idea that your doctor was getting a kickback when he was prescribing you the antipsychotic drug Risperdal. Keep in mind, Medicaid doesn’t pay doctors well, so they have to make it up someplace. Hope you are feeling better.

  • amtrend10 on 16 January 2010

    prescription kickback is the norm from all the pharms.

  • Steve Old Boy on 16 January 2010


    JPM (and all the others) are skillfully doing what they do best: enriching their executives with mind-numbing bonuses. It’s funny how they find a way to do that even with all these troubles…

  • AB on 16 January 2010

    Some of the smaller regional banks may not be in the same boat as JPM. Many of these banks did not write subprime or alt-A mortgages but simply got caught by the decline in real estate values with high loan to value loans on the books. In addition, many of these banks are currently selling at 20% of book value as compared to JPM at 100%+ book so there is some room for the stocks to absorb additional loss reserves. Also, a large portion of the commercial loans at the regional banks were real estate development loans which have already been accounted for in the loss reserves since these loans went bad early. I think there is potential to make some money by very selectively buying some of these regional banks. I would however, watch them like a hawk in case things head downill. I have put some money in a couple of these banks so I guess I will see if I am correct

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