J.P. Morgan's Troubles Run Deep
By Matthew Goldstein
Senior Writer
TheStreet.com
10/16/2002 11:11 AM EDT
It was no secret that J.P. Morgan Chase (JPM:NYSE - news - commentary - research - analysis) was going to post dreadful third-quarter earnings, and the nation's second-largest bank didn't disappoint.
Profits plunged 91% from a year earlier, leaving the bank with a scant $40 million in net income, or earnings of one penny, as the bank incurred more business loan losses and a $1.1 billion decline in trading revenue.
Maybe most startling was the news that J.P. Morgan's once-storied investment banking division posted a $256 million loss in the third quarter -- a performance that was far worse than other Wall Street firms. Much of that decline was due to the huge drop in trading revenue and an 18% year-over-year decline in stock and bond underwriting fees.
J.P. Morgan announced a much-anticipated restructuring that will include the elimination of 2,000 jobs in the fourth quarter.
Black Sheep
Indeed, just a day after banking rivals Citigroup (C:NYSE - news - commentary - research - analysis) and Bank of America (BAC:NYSE - news - commentary - research - analysis) gave investors something to cheer about when they posted better-than-expected profits, J.P. Morgan reminded Wall Street just how troubled some banks are today.
In fact, the investment bank's dismal performance is sure to increase calls for a top-line management shakeup at the bank. Many on Wall Street are now questioning whether the two-year-old merger of Chase Manhattan Bank and J.P. Morgan will ever work.
"It's pathetic that with a name like J.P. Morgan they can't make a decent business of it," said Sean Egan, president of Egan-Jones Ratings, a small corporate rating agency that has been critical of the bank's management for some time. "The merger clearly hasn't worked. They have to address the same items they had to address six months ago and that's getting the right people in charge."
Egan notes that the bank still faces potential legal and regulatory issues over its business dealings with Enron.
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Consumer Friendly
The one saving grace for J.P. Morgan, as it has been for other banks this year, was the strong performance of its consumer and middle-market financial-services business, which posted a 92% gain in operating earnings to $807 million.
The only other good news for the bank was that on an operating basis, which excluded a host of restructuring charges and other items, J.P. Morgan earned 16 cents a share. That beat the Thomson Financial/First Call consensus estimate of 7 cents, but that's only because analysts were expecting the absolute worst from J.P. Morgan after it issued a bleak earnings warning last month.
Total assets under management at the end of the quarter were $492 billion, down 9% from the second quarter and down 15% from the third quarter of 2001. Market depreciation and institutional outflows accounted for the year-on-year decline.
Another big problem area for J.P. Morgan has been the rising percentage of troubled commercial loans, particularly those to ailing telecommunications companies.
In the most recent quarter, the bank wrote off some $834 million in bad commercial loans, compared to $293 million in the previous quarter and $189 million in the third quarter of 2001. Consumer net charge-offs on a managed basis were $786 million, down from $862 million in the prior quarter and an increase from $626 million in the third quarter of 2001. The year-over-year increase was due to the inclusion of the Providian portfolio acquired during the first quarter of this year.
The bank increased its reserve account for loan losses to $1.8 billion from $800 million in the second quarter of this year. It had said it would do that when it issued an earning warning last month. Every time a bank must charge off a loan or increase its reserve account for bad loans, it cuts into earnings.
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