JP Morgan smashes forecasts as investment banking unit enjoys record quarter

A record third quarter for its investment bank helped propel profit far above expectations, with revenue also beating.

The largest US bank by assets beat analyst expectations for profit and revenue in the third quarter.

J.P. Morgan Chase said a record third quarter for its investment bank helped propel profit far above expectations.

The largest US bank by assets reported a third-quarter profit of $US6.29 billion, or $US1.58 a share. That compares with a profit of $US6.8 billion, or $US1.68 a share, in the year-earlier quarter when the bank benefited from a one-time $US2.2 billion tax benefit.

Analysts polled by Thomson Reuters had expected earnings of $US1.39 a share, and the beat helped send shares up around 1 per cent to $US68.39 in morning trading.

Revenue rose 8.3 per cent to $US24.67 billion, or $US25.51 billion on an adjusted basis. Analysts had expected adjusted revenue of $US24 billion.

The bank’s Wall Street footprint accounted for much of the better-than-expected performance. J.P. Morgan’s trading revenue rose by one-third to $US5.75 billion from $US4.34 billion in the third quarter of 2015, and investment-banking fees rose 15 per cent to $US1.85 billion, another record for the third quarter.

J.P. Morgan said a spur of activity tied to the UK’s June vote to leave the European Union, central bank actions and money-market fund reform caused fixed-income trading revenue to rise 48 per cent. Daniel Pinto, the executive who leads J.P. Morgan’s corporate and investment bank, said in a memo to employees, reviewed by The Wall Street Journal, that several groups in the bond trading division had their best third quarter in five years.

“We were firing on all cylinders,” said Marianne Lake, the bank’s chief financial officer, on a conference call with reporters. “Clients were motivated to act.”

There was good news in the bank’s bread-and-butter lending business as well. Total loans expanded by 10 per cent to $US888.05 billion, from a year earlier. And the new high-end Chase Sapphire Reserve credit card met its first-year goal for new accounts in just two weeks, wrote consumer bank chief Gordon Smith in a memo to employees, also reviewed by the Journal.

Yet despite the improvements, an important measure of J.P. Morgan’s profitability, its return on equity, was stagnant at 10 per cent. That is barely enough to cover its theoretical cost of capital. Even with the rise in the bank’s shares on Friday morning, they were still trading at less than 1.1 times J.P. Morgan’s book value, or net worth.

Overall profit at the corporate and investment bank was $US2.91 billion, roughly double the $US1.46 billion from the same period last year. Revenue in the unit, which the bank noted was a record for third quarters, came in at $US9.46 billion.

In the consumer bank, profit was $US2.2 billion compared with $US2.63 billion in the third quarter a year ago. J.P. Morgan’s commercial bank earned a record $US778 million, a 50 per cent increase from the $US518 million it earned in the year-earlier quarter, and the bank’s asset management unit reported a profit of $US557 million compared with $US475 million in the third quarter of 2015.

Costs decreased 5.9 per cent to $US14.46 billion from $US15.37 billion a year earlier, an effort the bank continues to drill down on, though Chief Financial Officer Marianne Lake said earlier this year that those drops would begin to taper off.

J.P. Morgan set aside $US1.27 billion in the third quarter to cover loans that could potentially turn bad in the future, an increase of 86 per cent from a year earlier. The bank said the increased reserves were necessary to support its loan growth, up 10 per cent from a year ago, as well as higher expected losses in its credit-card and other portfolios.

For much of the year, the bank has been adding reserves in its energy portfolio to cover potential losses, but in the third quarter sales of portfolios of oil and gas loans resulted in a $US121 million reduction in reserves at its commercial bank.

For the third consecutive quarter, the bank recorded an unusual legal gain. The $US71 million legal benefit it recorded during the third quarter compared with the $US1.3 billion it set aside a year ago.

J.P. Morgan has paid out billions of dollars in settlements over the past several years. It is expected to settle with regulators this fall for at least $US200 million over federal investigations into whether it tried to win business by hiring the sons and daughters of powerful people in Asia, The Wall Street Journal reported in July.

J.P. Morgan extended $US27.1 billion in mortgages in the quarter, a decrease of 9.3 per cent from the $US29.9 billion the bank extended in the third quarter a year earlier. Revenue in its mortgage division, the second-largest in the US by volume, was $US1.87 billion, up 21 per cent from the $US1.56 billion it reported in the year-earlier period.

Since the beginning of 2016, the bank’s shares are up 2.6 per cent compared with a 3 per cent decrease in the KBW Nasdaq index of bank stocks, after rising 5.5 per cent in 2015.

J.P. Morgan this quarter is kicking off bank earnings season with Citigroup and Wells Fargo & Co., both of which also report earnings Friday morning.

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