JPMorgan Has 2nd-Qtr Profit, Crimped by Trading Drop

(Bloomberg) -- JPMorgan Chase & Co., the third- biggest U.S. bank, posted its lowest quarterly profit in a year because of costs for legal settlements and a 50 percent decline in trading revenue.

The New York-based bank reported second-quarter earnings of $994 million, or 28 cents a share, compared with a loss of $548 million, or 27 cents, a year earlier. Revenue rose 48 percent to $12.7 billion, boosted by JPMorgan's July 2004 acquisition of Bank One Corp., the bank said in a statement today.

JPMorgan lost money on equity trades and, like rivals Citigroup Inc. and Bank of America Corp., made wrong-way bets on interest rates. Trading revenue fell $622 million, with particular weakness in Europe, results that Chief Executive Officer William Harrison, 61, described as ``very weak.''

``JPMorgan and Citi had the same bug,'' said Anton Schutz, who oversees $220 million at Burnham Financial Funds, including JPMorgan shares. ``The numbers would have been down substantially more without Bank One.''

Total revenue would have fallen 4.2 percent had JPMorgan and Bank One been a single company in the year-ago period.

Excluding $1.9 billion in pretax legal reserves and costs related to the $58 billion Bank One purchase, JPMorgan said second-quarter profit would have been $2.3 billion, or 66 cents a share, The company was expected to earn 64 cents a share, the average estimate of 18 analysts surveyed by Thomson Financial.

Shares of JPMorgan rose to $35.25 in 8:52 a.m. trading before U.S. stock exchanges opened from $35.21 yesterday.

Fixed-Income Dependency

JPMorgan has been even more dependent on buying and selling bonds and debt derivatives than Citigroup, which on July 18 reported a 28 percent drop in revenue from fixed-income trading. Today, JPMorgan said it suffered losses in equity trading on ``client-driven positions'' and wrote down the value of some receivables over a disputed claim.

``Market conditions, as you've heard from competitors and us, were very difficult,'' Chief Financial Officer Michael Cavanagh said on a conference call with reporters. ``It made it very difficult for traders to make money.''

Revenue from fixed-income trading fell 27 percent to $940 million. In equity trading, JPMorgan's loss widened to $280 million from $86 million in the year-earlier period.

Trading conditions improved in June and ``we see that continue in July,'' Cavanagh said. He declined to specify which equity positions lost money.

Trading Bet

JPMorgan's value at risk, a mathematical estimate of how much the bank could lose trading in single day if markets turned against it, rose to $102 million in the recent period from $65 million in the first quarter.

Profit at JPMorgan's investment bank, which includes trading, fell 6 percent to $606 million. Fees from advisory work rose 34 percent to $359 million, as JPMorgan ended the quarter ranked No. 1 in completed mergers and acquisitions.

By June 1, when JPMorgan said trading results for the two months ended in May were ``the worst the firm has experienced in some time,'' Standard & Poor's had cut its credit ratings on General Motors Corp. and Ford Motor Co. to non-investment grade and investors were demanding a greater premium to buy corporate bonds.

Citigroup Chief Financial Officer Sallie Krawcheck on July 18 highlighted the so-called flattening yield curve -- when the gap between short-term and long-term interest rates narrows -- as one of the biggest challenges in fixed-income trading during the second quarter.

Legal Costs

The changing market conditions caught most Wall Street firms off-guard. Morgan Stanley reported a 28 percent drop in fixed-income trading revenue for the three months that ended in May. Goldman Sachs Group Inc.'s fell 20 percent, and profit at both declined.

JPMorgan set aside $1.2 billion after tax in June to settle claims it played a role in the frauds at WorldCom Inc. and Enron Corp. That's down from the $2.3 billion that the bank added to reserves a year ago, leading to the quarterly loss.

Shares of JPMorgan have declined 9.7 percent this year, making it the third-worst performer in the Philadelphia Stock Exchange KBW Bank Index. The shares fell 30 cents to $35.21 yesterday in New York Stock Exchange composite trading.

Analysts' estimates have missed JPMorgan's earnings by an average of 11 percent in the past five quarters, overestimating results in one quarter by as much as 18 percent and underestimating them by 17 percent in another.

a.m. New York time.)

To contact the reporter on this story:
Justin Baer in New York at jbaer1@bloomberg.net

Last Updated: July 20, 2005 08:55 EDT

Citibank Suspected of Illicit Interest Gains

By Kim Yon-se
Staff Reporter

Citibank Korea has been suspected of having reaped about 12 billion won ($12.4 million) in illegal gains involving its mortgage loan businesses over the past few years.

The suspicion has surfaced after the labor union at KorAm Bank, acquired by Citigroup last year, on Tuesday filed a complaint against Citibank Korea and its vice president, Richard Jackson, with the prosecution.

The union alleges that the bank booked the irregular gains by charging fixed interest rates on mortgage loans it sold though the interest rate on the loans should have floated according to market rates under initial contracts during 2002 and 2005.

During the period, floating rates hovered below the initial lending rate of 7.9 percent due to a series of rate cuts by the Bank of Korea (BOK). But the bank maintained the fixed rate on mortgage loans in the breach of contracts with its clients, the union said.

``Considering that the average loan rate offered by other banks stood at around 6.5 percent over the period, it is estimated that Citibank enjoyed 12 billion won in illegal gains,’’ a union official said.

He said the bank lowered the lending rate for only customers who had complained about the fixed interest rates.

``Citi continued to charge the initial rate of 7.9 percent on borrowers who filed no complaint,’’ the union official said.

The number of customers of the Citi’s mortgage loan product was about 30,000 at the end of 2002 and 13,000 at the end of February 2005.

The union said vice president Richard Jackson, an Englishman who has been in charge of consumer lending since before the merger between KorAm and Citibank, is allegedly responsible for the fraudulent loan practices.

Jackson, who joined the Citibank in 1985, has been in charge of the consumer businesses even after the bank’s acquisition of KorAm Bank in 2004.

Citibank Korea cut the interest rate on the product by 1 percentage point to 6.9 percent in April 2005 as financial regulators intervened in the case, according to the union.

In its official letter to Citibank in March 2005, the Financial Supervisory Service (FSS) ordered the bank to correct the improper lending practices.

The FSS also said Citibank Korea violated the basic principle of equality by lowering rates for only borrowers who filed complaints.

Meanwhile, the FSS and the U.S. Federal Reserve have recently launched a joint probe into Citibank Korea. It is the first time that foreign financial firms here have been investigated by regulators from their own countries.

The Korean and U.S. regulators are keeping the purpose of the probe confidential, while financial sources allege the action has been motivated by U.S.-based Citigroup’s series of illegal business activities worldwide.

Citigroup has been penalized for a variety of rule-breach, such as unfair bond trading in Europe, illegal private banking in Japan, illegal stock issuance in China and involvement in Enron’s accounting scandal in the U.S.

As the global investment bank continued to push for mergers and acquisitions (M&As) despite the illicit practices at branches all over the world, the Federal Reserve Board ordered the bank in March 2005 to hold back the M&A business.

``We believe the union’s case is without merit. Our pricing was both responsible and in line with market conditions at the time. It is also consistent with our agreements with our customers,’’ Citibank Korea said in a statement.

``We aim to provide the best competitive financial products and services in the Korean market. For example, we offer one of the highest rates of interest for time deposits, currently at 3.85 percent,’’ it added.

Citi, Bank of America fall on earnings

Citi, Bank of America fall on earnings
MarketWatch, Inc
Greg Morcroft

NEW YORK (MarketWatch) -- Shares of Citigroup and Bank of America fell in early trading after reporting earnings that showed growing margin pressures. Citi share fell 1.9% to $45.55 and Bank of America shares slipped 1.5% to $45.31. In the broader financial sector, the Amex Securities Broker/Dealer Index fell 0.1 %, the Philadelphia Bank Sector Index fell 0.4% and the S&P Insurance Index fell 0.1%

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