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J.P. Morgan Warns on Earnings
Tuesday September 17, 7:55 pm ET
By Mary Kelleher
NEW YORK (Reuters) - J.P. Morgan Chase & Co. Inc. (NYSE:JPM - News) on Tuesday warned its third-quarter earnings would be well below their second-quarter level due to weak trading results and bad loans to telecommunications and cable firms.
The news was a bad omen for other banks, especially those participating in loans made by J.P. Morgan, a top loan syndicator which divvies out its loans to earn fees and share risk. Its trading losses also bode poorly for brokers, which are about to post third-quarter results.
The No. 2 U.S. banking company earned 58 cents per share in the second quarter on an operating basis. The bank would not quantify expected third quarter earnings, but one analyst said he would be surprised if J.P. Morgan made any money at all.
J.P. Morgan Chief Executive William Harrison said the bank might have to cut jobs, as it wrestles with steep loan defaults by cable and telecommunications firms as well as wrong trading bets.
"In hindsight we had too much concentration in the telecom space and did not anticipate the level of deterioration this year, and in particular that we are experiencing, and deterioration that accelerated throughout the year," Harrison told analysts. "I am obviously disappointed with our results and take full responsibility for them."
The warning came after the stock market closed, and J.P. Morgan Chase shares dropped sharply in after-hours trade on Instinet. The company's corporate bonds also fell, and debt rating agencies Standard & Poor's and Fitch cut their ratings on J.P. Morgan debt.
It was the latest blow to J.P. Morgan Chase, which has faced mostly tough times since its December 2000 merger. The bank has been tarred by financings it set up for bankrupt energy trader Enron Corp., as well by losses in Argentina, the stock market downturn and sluggish investment banking results.
"It really signals that in general banks are going to see a big increase in nonperforming assets," said Reilly Tierney, an analyst at Fox-Pitt, Kelton. Tierney said it would be unlikely that J.P. Morgan would make money in the third quarter.
"The really big surprise for the brokerage industry is the significant trading losses they posted in the first two months," he said.
J.P. Morgan's stock quickly fell after hours to $19.51 on Instinet. The stock last traded on the New York Stock Exchange Tuesday at $21.55, down less than 1 percent. Yields on J.P. Morgan bonds rose, a sign that investors see more risk.
Commercial credit costs -- including significantly higher writeoffs and reserves -- are expected to be about $1.4 billion in the quarter, up from $302 million in the second quarter, the bank said. Commercial nonperforming assets, or loans with potential repayment problems, are expected to increase by about $1 billion, it said.
Problems centered in the telecom and cable sectors, where J.P. Morgan was a leading lender. These businesses are struggling with overcapacity and declining demand. Two top players -- Global Crossing and WorldCom -- have filed for bankruptcy protection.
"There has been a significant increase in the level of criticized assets and in the severity of the condition of those credits," Marc Shapiro, a J.P. Morgan Chase vice chairman in charge of finance told analysts of the bank's telecom portfolio. Shapiro said it was too soon to say if the outlook for problem loans would improve after the third quarter.
Total trading revenues at the investment bank also were about $100 million for the first two months of the quarter, compared with $1.1 billion for the second quarter. Part of losses came from trades the bank does for its own books.
"We had wrong positions in difficult markets," J.P. Morgan Chase Chief Financial Officer Dina Dublon told analysts. "We lost money across our dealer book. We also had a loss in our proprietary trading desk."
Analysts had expected it to earn between 45 and 63 cents a share in the third quarter, with a mean estimate of 54 cents, according to market data firm Thomson First Call.
"It would be unlikely to me that they could make any money this quarter if they lost a billion dollars in trading and a billion more than I thought was expecting in credit costs," Tierney said. "It would be a challenge to break even."
Despite its difficulties, J.P. Morgan said it plans to keep its dividend at the current level of 34 cents a share per quarter.
Partly offsetting this were investment securities gains of $300 million for the two months, the bank said.
J.P. Morgan's 6.625 percent notes maturing in 2012 yield 5.621 percent, or 1.8 percentage points more than U.S. Treasuries, up from 1.69 percentage points more than Treasuries on Monday, according to TRACE, the National Association of Securities Dealers' bond pricing service. |
