JPMorgan, Wells Fargo third-quarter profits dip amid credit crises
Published Wednesday October 15th, 2008
NEW YORK - In the midst of one of the worst credit crises in the United States, JPMorgan Chase & Co. and Wells Fargo & Co. managed to report better-than-expected third-quarter results on Wednesday. But even two of the country's strongest banks proved they are not immune to the widespread credit problems plaguing their peers.
Both banks reported sharp declines in profit as they took hits on investments and increased their credit reserves to prepare for troubles ahead. But given the waning economy and the current shake-up in the markets, the credit problems did not come as a surprise to most analysts. While many remain cautious of the worsening economy, analysts generally viewed the results as positive.
"If you look at the reports today, there is no surprise that they ran into some more credit issues," said Michael Sheldon, chief strategist at RDM Financial Group. "Overall, the long-term growth story remains a positive in the eyes of investors."
JPMorgan Chase, which bought Washington Mutual Inc. last month and Bear Stearns Cos. in March, earned US$527 million, or 11 cents per share, in the period ended Sept. 30. That was down 84 per cent from $3.4 billion, or 97 cents per share, a year earlier. Analysts polled by Thomson Reuters, on average, had predicted a loss of 21 cents per share.
Wells Fargo, whose pending purchase of Wachovia Corp. puts it squarely in the top ranks of U.S. banking, reported a 25 per cent profit decline. The San Francisco-based bank earned $1.64 billion, or 49 cents per share, compared with $2.17 billion, or 64 cents per share, in the prior-year quarter. Analysts had expected a profit of 41 cents per share.
The reports follow that of Bank of America Corp., which surprised investors last week by announcing its quarterly results earlier than planned. The Charlotte, N.C., bank saw its profit fall 68 per cent to $1.18 billion, or 15 cents per share, down from $3.7 billion, or 82 cents per share, in the same period last year. That was much lower than analysts' estimates of 62 cents per share.
The bank also revealed plans to boost capital by selling $10 billion of stock and halving its dividend. Like JPMorgan and Wells Fargo, Bank of America has made significant acquisitions in the past year, scooping up troubled mortgage lender Countrywide Financial Corp., investment bank Merrill Lynch & Co. and La Salle Bank. These three deals are driving the need for extra cash.
Citigroup - the last of the top four banks to report - will release its results on Thursday.
Investors sent shares of Wells Fargo down 17 cents to $33.35 as the broader market tumbled. JPMorgan shares dropped $2.22, or 5.5 per cent, to $38.49.
"JPMorgan also has a larger investment banking division that Wells Fargo doesn't have; they have additional issues that Wells Fargo doesn't have to deal with," Sheldon said.
JPMorgan's investment bank wrote down $3.6 billion from its mortgage investments and leveraged lending exposures, due largely to the troubled assets at Bear Stearns. It also boosted loan loss reserves by $1.3 billion to $15.3 billion, or $19 billion including Washington Mutual, to prepare for a worsening environment for lending.
Wells Fargo increased its credit reserves by $500 million, lowering earnings by 10 cents per share, in anticipation of higher losses in several of its consumer credit businesses. Overall, the bank took a $2.5 billion provision against potential bad loans.
Both banks took hits on their investments in Fannie Mae and Freddie Mac, which were seized by the government last month.
Wells Fargo, particularly, benefited from a huge influx of deposits during the quarter. Core deposits increased $23.7 billion, or 30 per cent, from June 30, while average loans grew by $53.5 billion, or 15 per cent, from a year ago.
"Wells Fargo clearly appears to have been a beneficiary again of a systemwide flight to quality on the asset side," wrote Sandler O'Neill & Partners analyst R. Scott Siefers in a note to clients. "Still, we cannot get too excited about such strong balance sheet growth at a time when credit trends are deteriorating and the economy appears headed for some very choppy waters in coming quarters."
The third quarter proved to be one of the most tumultuous times in America's economy since the stock market crash of 1929. Unprecedented market turmoil, sparked by a bust in the housing market, led to the bankruptcy of investment bank Lehman Brothers Holdings Inc. and the near-collapse of insurer American International Group Inc.
Fear has since permeated the market, resulting in a seize-up of lending.
On Tuesday, the Bush administration announced it will invest $250 billion into the country's leading banks, including JPMorgan, Wells Fargo, Bank of America and Citigroup, in return for a stake in those institutions. The move is designed to stabilize the financial system and induce banks to lend again. The plan is part of the $700 billion financial rescue package passed by Congress earlier this month.
During a conference call with analysts, JPMorgan chief executive Jamie Dimon said he is not yet sure how the bank will use its $25 billion from the government, but that he intends to use it to benefit shareholders and customers. Wells Fargo, meanwhile, said it plans to use the capital to continue to provide credit to consumers and businesses, as well as help fund its acquisition of Wachovia.
"I think you have to be somewhat concerned just looking at what is happening to the economy, but you also have to recognize the fact that the Treasury and the government have put together a number of bold plans over the past few weeks," Sheldon said. "All of those should help stabilize financial institutions."
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