J.P. Morgan Second-Quarter Profit Falls 8.7%; 'Whale' Losses $4.4 Billion
Category: Global Market
July 13, 2012 / By SAABIRA CHAUDHURI/ WSJ
J.P. Morgan Chase JPM -1.62% & Co.'s second-quarter earnings fell 8.7% on a double-digit decline in revenue and a $4.4 billion trading loss on its chief investment office's synthetic credit portfolio.
The U.S.'s largest bank by assets posted a $5 billion second-quarter profit and tied some trading losses at its Chief Investment Office to possible mismarking of positions.
It said it would restate its first-quarter results to reduce profits and revenue, reflecting "recently discovered information that raises questions about the integrity of the trader marks and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses in the portfolio during the first quarter."
The restatement is the latest fallout from an episode that has bruised the bank since The Wall Street Journal reported in April that traders in the Chief Investment Office were making outsize bets on certain corporate credit indexes. The Wall Street Journal reported Friday that three traders involved in the money-losing bets, including Bruno Iksil, known as the "London Whale," had left the company.
The New York company said Friday that using market benchmarks to value certain structured-credit positions at the Chief Investment Office would reduce revenue for the first quarter by $660 million and net income by $459 million.
Those losses come in addition to $4.4 billion of second-quarter losses on the CIO trades. Including that loss, the company posted a second-quarter profit of $5 billion, or $1.21 a share. That's down from $5.4 billion, or $1.29 a share a year earlier.
The Justice Department and the Securities and Exchange Commission are both investigating the trading loss, which has aroused intense scrutiny in Washington, where some lawmakers have been fighting efforts by big banks to delay or scale back regulations mandated by the 2010 Dodd-Frank financial overhaul.
The trading losses knocked the reputation of the bank, which weathered the financial crisis better than most peers, at a time when large banks are fighting efforts by regulators to rein in risky trading. The so-called Volcker rule, set to take effect this month, would restrict banks' ability to trade with their own money.
"Since the end of the first quarter, we have significantly reduced the total synthetic credit risk in CIO—whether measured by notional amounts, stress testing or other statistical methods," Chief Executive James Dimon said. "The reduction in risk has brought the portfolio to a scale that allowed us to transfer substantially all remaining synthetic credit positions to the Investment Bank."
J.P. Morgan's results kick off the reporting season for U.S. banks, delivering investors the first look at a quarter expected to show lackluster results from the nation's largest financial institutions amid tepid loan demand and low interest rates.
J.P. Morgan's investment-banking arm turned a profit of $1.91 billion, down 7% from a year earlier but up 14% from the first quarter.
The bank's retail services business, which handles consumer and small-business clients, reported a profit of $2.27 billion, surging from $383 million a year earlier and up 29% from the first quarter.
J.P. Morgan reported a profit of $4.96 billion, down from $5.43 billion a year earlier. On a per-share basis, earnings were $1.21 versus $1.27. The latest period included a net per-share gain of one penny tied to the bank's securities gains, debt valuation gains and reduced reserve for loan losses, among other things.
Analysts polled by Thomson Reuters expected a per-share profit of 70 cents.
Revenue on a managed basis fell 16% to $22.89 billion. Analysts were looking for $21.79 billion.
Overall, the bank's credit-loss provisions—funds set aside to handle future loan losses—totaled $214 million, down significantly from $1.81 billion a year earlier and also below the $726 million set aside in the first quarter.
Shares were off 0.7% at $33.80 premarket. Through Thursday's close, the stock is down 21% in the past three months.