There are those who believe that JPM's acquisition of BS might prove
too much of a BEAR!
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"J.P. Morgan Hit Hard by Credit Crisis"
"First-Quarter Profit Still Above Expectations"
By Tomoeh Murakami Tse and Thomas Heath
Wa****ngton Post Staff Writers
Thursday, April 17, 2008; D01
NEW YORK, April 16 -- J.P. Morgan Chase, which previously escaped
largely unscathed from severe problems in the mortgage market,
re****ted Wednesday that its first-quarter profit fell by half, showing
how credit troubles in subprime home loans are now spreading to other
types of consumer and business debt.
Earnings at J.P. Morgan, the country's second-largest commercial bank,
were hurt by $2.6 billion in write-downs as the firm restated the
value of distressed assets on its books, including subprime and other
mortgages, and leveraged loans for cor****ate takeovers. Profit was
also pounded by the bank's decision to set aside $2.5 billion more to
cover expected losses on a wide range of loans.
Still, the results came in above the expectations of most analysts.
Combined with a not-so-dire earnings re****t from Wells Fargo and an
optimistic growth outlook from chipmaker Intel, the J.P. Morgan
earnings inspired investors to hope that the worst of the subprime
crisis had passed.
All major stock indicators rose. The Dow Jones industrial average rose
256.80 points, or 2.1 percent, to 12,619.27. The Standard & Poor's 500-
stock index rose 30.28, or 2.3 percent, to 1364.71. The Nasdaq
composite index gained 64.07, or 2.8 percent, to 2350.11.
"We may have seen the worst headlines in terms of how much money the
financials lose a quarter, but there is still tons of trouble ahead,"
said Michael Tarsala, managing analyst of Thomson Squawk Box. "This
isn't going away. I don't see a bottom for the financials."
Merrill Lynch and Citigroup, two firms hit particularly hard by the
subprime debacle, are scheduled to re****t their first-quarter earnings
Thursday and Friday, respectively, and both are expected to post
losses. Analysts expect Merrill Lynch to write down $6 to $8 billion
more in assets, after write-downs of more than $14 billion in the
previous quarter. A sizable write-down is also expected at Citigroup,
though most analysts do not predict that its loss will top that of the
fourth quarter of 2007.
J.P. Morgan's earnings reflected the deteriorating economic conditions
that will pressure the bottom lines of U.S. banks for months to come.
The $2.5 billion that J.P. Morgan provisioned for expected losses on
home-equity loans, credit card debt, auto loans and other debt was
more than double what the bank set aside in the previous quarter.
Meanwhile, Wells Fargo, the nation's fifth-largest bank, said it was
increasing its credit-loss provision by $2 billion, primarily to
account for expected declines in the performance of home-equity loans
and loans to small businesses. The San Francisco-based bank said first-
quarter profit fell 11 percent, to $2 billion, on revenue of $10.56
billion -- better than Wall Street expected.
The increase in loan-loss provisions is "a reflection of what is
taking place in the real economy," said Eric D. Hovde, who runs a
District-based hedge fund that trades in bank stocks. "You are seeing
massive write-downs in housing-related credit. . . . But you haven't
seen meaningful write-down in other areas until this last quarter. So
it is going to take six, eight, nine months before you will see banks
taking write-down from credit losses in other areas such as commercial
real estate and business loans."
Jamie Dimon, J.P. Morgan's chairman and chief executive, said he
expected capital markets to remain under stress and the economic
environment to continue to be weak.
"These factors have affected, and are likely to continue to negatively
impact, our firm's credit losses, overall business volumes and
earnings -- possibly through the remainder of the year or longer," he
said.
J.P. Morgan said it had a profit of $2.37 billion (68 cents a share)
for the first three months of the year on revenue of $16.89 billion.
The company had a profit of $4.79 billion ($1.34) in a record first
quarter last year. Analysts surveyed by Reuters had estimated profit
of 65 cents a share. Earnings were helped by $955 million in after-tax
proceeds from the initial public offering of Visa, but losses in other
areas overwhelmed the gains.
Among those was a $1.1 billion write-down in leveraged loans, used to
finance cor****ate takeovers by private-equity firms. They had been a
lucrative activity for banks until the credit crunch hit last summer.
The write-down brought the bank's exposure to leveraged loans to $22.5
billion. It's "still obviously a large risk for us," said Michael J.
Cavanagh, J.P. Morgan's chief financial officer.
The bank also has a $95 billion exposure to home-equity loans. It
wrote off $447 million in such loans and set aside $1.1 billion for
future losses.
Asked during a conference call with analysts if there were signs that
losses in home equity were stabilizing, Dimon said: "No. It's exactly
what we saw. More houses are going negative equity. . . . Home prices
we expect to still go down." Another emerging area of worry was prime
mortgages, or loans to home buyers with good credit, where
delinquencies rose sharply during the quarter.
"Underlying credit is worse than we thought and probably more
widespread than we thought," analyst Jeffery Harte of Sandler O'Neil
said in an interview. He was surprised by the write-off for prime
mortgages. "There's not many things to like as far as the credit
environment right now. . . . The question is how bad is it going to
get, and we just don't know that."
J.P. Morgan executives also shed some light on the company's
acquisition of Bear Stearns, a major Wall Street investment bank that
nearly went bankrupt last month after lenders refused to extend it any
more credit. J.P. Morgan said it expects the deal to close by June 30.
Hundreds of employees are working on integrating the businesses, said
Dimon, who added that jobs will be cut at both Bear Stearns and J.P.
Morgan.
http://www.wa****ngtonpost.com/wp-dyn/content/article/2008/04/16/AR2008041603483.html
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