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