JPMorgan Shows Citi How It's Done

Wall Street analysts were expecting banking giant JPMorgan Chase (NYSE: JPM) to report $0.90 in earnings per share for its third quarter, down slightly from the prior year. JPMorgan, however, said "nice guess, thanks for playing," and reported EPS of $0.97, up 5% from the prior year.

With the exception of Goldman Sachs (NYSE: GS), the earnings from many of the investment banks have been lacking a certain je ne sais quoi lately -- let's call it "positive growth." Citigroup (NYSE: C), which is a closer comparable to JPMorgan, produced a downright ugly quarter that has only turned the screws a bit further on its embattled CEO. Merrill Lynch (NYSE: MER) hasn't made it official yet, but that report isn't going to be much of a looker, either. So the 5% EPS growth from JPMorgan may be a bit of financial-services antacid for its investors.

But first ...
Before I pat too many backs here, let's not forget that this isn't a great quarter -- it's just a good quarter considering the circumstances.

The firm's investment banking division had a pretty nasty go of it. Off the top, revenue in that segment was down 39% over the third quarter of 2006, and net income was off 70%. The comparisons to the second quarter of this year are even worse. A big part of the lousy performance was thanks to $1.3 billion worth of write-offs from leveraged loan funding commitments and collateralized debt positions. If this sounds familiar, it's because it is -- nearly all of the major investment banks have had massive write-offs in these areas.

Not surprisingly, deal advisory was one of the few bright spots in the investment banking group. Fees from advisory services were up 36% year over year, as the deal market continued to push on during the quarter.

While it wasn't nearly as bad as investment banking, the retail financial services segment wasn't particularly rosy, either. Though revenue was up 18% year over year, net income declined 14%. The difficulty came from the bank's exposure to high loan-to-value home equity loans and subprime loans. Provisions for credit losses for the quarter were $680 million, up 496% from the prior year.

Making up lost ground
What's impressive about the quarter for JPMorgan, then, is that its other segments were able to produce results good enough to make up for the squeeze from the aforementioned struggling businesses.

Of note were the treasury and security services and asset management segments, which grew net income 41% and 51%, respectively. Asset management looked to be hitting on nearly all cylinders, as it grew revenue 35% on strong growth in assets under management and higher performance fees while increasing non-interest expenses just 23%.

The corporate segment, which included $766 million of private equity gains, was also a big help in buoying JPMorgan's results. Corporate net income for the quarter clocked in at $513 million versus a measly $31 million last year. Fortuitous? You bet.

No sigh of relief yet
In the financial services and banking industries right now, "good" is the new "not bad," and JPMorgan's quarter was good. However, with no signs of a bottom on the housing market so far and the U.S. economy looking a bit questionable, it'd still be premature for JPMorgan to wipe its brow and say "Whew! Glad that's over!"

© 2007 Universal Press Syndicate.