JPMorgan Chase Beats Street; Mortgages Still a Problem

Throughout the credit crisis, one bank has avoided reporting even one quarterly loss. On Thursday, JP Morgan Chase & Co. (JPM) kept its perfect streak intact, reporting $2.14bn, or $.40/share, in net earnings for the first quarter. The total was off 10% from one year earlier, but better than most analysts had expected. The firm benefited from an expanding deposit base, thanks to its acquisition of Washington Mutual, and a jump in mortgage refinancing activity, it said. Growth on the top line, helped by record revenues in investment banking operations, helped to offset $10bn in credit costs. With borrowing costs at historic lows, JPMorgan — much like Goldman Sachs (GS) earlier this week — saw revenues soar in fixed-income trading activity, to $4.9bn. The bank’s results seem likely to bolster investor hopes that low interest rates and a return of mortgage lending activity can help banks offset a rising tide of loan losses that appear to be spreading across all categories. That surging loss experience certainly applies to mortgage exposure at JPMorgan. The company’s retail and consumer lending division, the majority of its mortgage-related operations, saw credit costs soar to to $3.9bn, up from $857m one year ago and $301m one quarter earlier. Prime mortgages continue to sour, with 30-day delinquencies continuing to increase during the quarter among the $65.4bn in prime mortgages held on the firm’s books. Net charge-offs among prime mortgages rose to $312m during Q12009, up from $195m just one quarter earlier; non-performing prime mortgages reached $2.6bn for the quarter, up sharply from $860m one year earlier. JP Morgan said it expects losses on its prime mortgage portfolio could be as high as $500m over the “next several quarters.” The picture isn’t much better for $111.7bn in owned home equity loans and lines of credit at JPMorgan, with net charge-offs in the home equity portfolio rising a whopping 42% in just one quarter to $1.1bn. Non-performing loans rose to $1.6bn by the end of the quarter from $1.4bn one quarter earlier, with JPM warning that losses in the home equity portfolio could be as high as $1.4bn per quarter for the foreseeable future. Subprime mortgages contributed $364m in net charge-offs during the quarter, as well; JPMorgan reported holding $14.6bn in subprime mortgages at the end of period, down from $15.3bn one quarter earlier. But the real credit costs tied to mortgages here could be much higher than JPMorgan is reporting — it’s important to note that all of the bank’s reported mortgage holdings and statistics exclude purchased credit-impaired loans acquired as part of the WaMu deal. Meaning that it’s impossible to know the full extent of mortgage problems at JPM, a problem we’ve started to see at large banks that have made significant acquisitions of large mortgage platforms. While credit costs continue to mount, originations of new mortgages rose 34% quarter over quarter to $37.7bn on a refi surge; originations during Q12009, however, remain 20% below year ago levels. Home equity originations continued to fall as banks have shied away from the product, falling 87% to $878 million. CEO Jamie Dimon has been blunt about his desire to repay $25bn in government funds the bank received via the Troubled Asset Relief Program, and reiterated that stance in a conference call with analysts Thursday morning, calling TARP funding a “scarlet letter.” Full earnings information is available here. Write to Paul Jackson at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

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