J.P. Morgan Rides Consumer Revival

J.P. Morgan Rides Consumer Revival

By DAN FITZPATRICK

J.P. Morgan Chase & Co. posted a 47% jump in fourth-quarter profit, providing a boost to bank stocks Friday as investors cheered new signs of strength among U.S. consumers and businesses.
J.P. Morgan's James Dimon says, 'I think the future is extremely bright, despite all the headwinds.' Above, leaving a meeting about AIG's planned stock sale on Thursday.

.Chief Executive James Dimon predicted demand for new credit would increase in 2011. The U.S. consumer, he said, "is getting stronger," and certain firms are showing new appetite for loans.

"I think the future is extremely bright, despite all the headwinds," he said.

Results for the New York bank, an industry bellwether, helped lift the share prices of the nation's largest banks on Friday. Led by a 1.03% jump at J.P. Morgan, shares of Bank of America rose more than 3%. Wells Fargo & Co. rose nearly 3% while Citigroup Inc. was up nearly 2%.

J.P. Morgan's results of $1.12 a share, which handily exceeded Wall Street's expectations of 99 cents, help illustrate how the nation's largest banks are taking advantage of their size and diversity as they work through many problems.

Rarely has the difference between big and small banks been so stark. Three institutions, including J.P. Morgan Chase, now hold more than 33% of all U.S. deposits and are responsible for more than half of all home mortgage originations.

One sign of J.P. Morgan's sweeping market share during the quarter was that it issued $50.8 billion in new mortgage loans, up 24% compared with the year-ago quarter. Total loans were up 9% as compared with a year ago.

It also recorded revenue gains in five of its six business lines, while its number of nonperforming loans declined 16% to $16.6 billion. Fewer bad loans allowed it to release about $2 billion in reserves, a big contributor to profits. Overall net income for the quarter was $4.83 billion, up from $3.28 billion.

While big banks are putting the U.S. downturn behind them, regional banks are still dealing with their overreliance on real estate even as their earnings improve from year-ago levels.

M&T Bank Corp., a Buffalo, N.Y., bank with $68 billion in assets, compared with J.P. Morgan's $2.1 trillion, said Friday that fourth-quarter net income rose 49% to $204 million from year-earlier levels. Still, nonperforming loans rose 13% from third quarter levels due to two problem borrowers and an increase in foreclosed properties. The troubled loans came from a residential builder and a developer of retirement and assisted-living properties.

The rising number of nonperforming assets remains "a lingering concern" for M&T, said Ken Zerbe, banking analyst with Morgan Stanley, in a note.

While J.P. Morgan shares jumped Friday, M&T stock was down for much of the day before ending up 0.14%.

Many regionals don't have investment banks—big revenue generators for J.P. Morgan and other national banks. The unit was the company's most profitable, with $1.5 billion in net income buoyed by a 26% increase in revenue. Debt underwriting fees were up 26% as businesses turned to credit markets for funding. Fixed-income trading revenue was up 5%.

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.Compensation in J.P. Morgan's investment bank increased 4% but that is largely because the number of employees dropped. The average pay per employee in the investment bank dipped 2.4% to $369,651.

J.P. Morgan showed strength in its Main Street business, as well. Both credit cards and its retail unit were profitable, compared with losses in the year-ago period. In cards, the number of loans written off as uncollectible dropped to 7.08%, from 8.64% in the year-ago period. That allowed the bank to release $2 billion in card reserves.

Investors still aren't pleased that big banks continue to rely so heavily on improving credit conditions, and their attendant release of reserves, to pump profits. In a Friday call with reporters, Mr. Dimon conceded in regard to the bank's big reserve release: "I don't look at it as earnings."

Plenty of challenges remain for J.P. Morgan and other big banks. The U.S. housing market, Mr. Dimon said, is still "terrible" and J.P. Morgan needs to decide how it will replace revenues it expects to lose to new regulations. Mr. Dimon said Friday the bank is considering new checking and debit-card fees to compensate for clamp-downs on its consumer business.

Another headache for J.P. Morgan revolves around its exposure to mortgage documentation problems and mounting demands that it repurchase bad mortgages issued before the housing bust. J.P. Morgan set aside $1.5 billion of additional reserves largely to deal with any litigation resulting from buyback demands.

"It is going to be a long, ugly mess," Mr. Dimon said, but "it will not be life-threatening to J.P. Morgan." The bank has $3 billion in reserves for this issue, and it expects 2011 repurchase losses to be about $1.2 billion.

It "will be years before we know the ultimate outcome" he added. "We will be talking about his every quarter for the next three years."

—Robin Sidel contributed to this article.
Write to Dan Fitzpatrick at dan.fitzpatrick@wsj.com