J.P. Morgan swings to loss on massive legal costs : Extensive Report, Thanks

By Saabira Chaudhuri

J.P. Morgan Chase & Co. reported swinging to a rare loss in the third quarter as it reeled from billions of dollars in legal expenses
The New York bank run by Chairman and CEO James Dimon was one of the few large financial institutions to make it through the financial crisis without reporting a quarterly loss
In fact, it hadn't reported a quarterly loss since Mr. Dimon joined the bank with the merger of J.P. Morgan and Bank One Corp. in 2004
The streak ended Friday as the bank announced a loss of $380 million, largely due to a $9.15 billion litigation expense

Mr. Dimon said "while we expect our litigation costs should abate and normalize over time, they may continue to be volatile over the next several quarters."

Still, shares were up 2% to $53.56 in recent premarket trading as core earnings beat the estimates of analysts polled by Thomson Reuters
Results were bolstered by improved credit quality, loan growth and strong equity trading revenue

J.P. Morgan posted a loss of 17 cents a share, versus a profit of $5.71 billion, or $1.40 a share, a year earlier

The latest period included a net $1.85 per-share loss tied to legal expenses

The year-earlier period included a net gain of four cents a share tied to reduced mortgage loan reserves, charge-offs, debt extinguishment gains and litigation reserves

Excluding charges, earning were $1.42 a share in the latest period

Revenue on a managed basis--which excludes the impact of credit-card securitizations and is on a tax-equivalent basis--was down 7.7% to $23.88 billion

Analysts polled by Thomson Reuters expected a per-share profit of $1.17 on revenue of $23.94 billion

The hefty litigation expense compares with the $684 million reported a year earlier and $600 million in the second quarter

The bank had said it expected to increase litigation reserves by at least $1.5 billion this quarter

As of the end of the third quarter, J.P. Morgan Chase said it had a stockpile of $23 billion in total reserves set aside for litigation, a number it hasn't previously disclosed

That includes the $9.15 billion added during the third quarter

A stockpile that large should allow the bank to swallow a number of settlements and payouts, although the company warned of continued "uncertainty" around litigation costs "despite strengthening our reserves to this degree."

J.P. Morgan kicks off the reporting season for U.S. banks, delivering investors the first look at a quarter in which results are expected to be stymied by weaker revenue from mortgage refinancing and fixed-income capital markets, while high legal costs create an added headwind

No U.S. bank is grappling with as much regulatory and legal scrutiny as J.P. Morgan

Authorities have been investigating whether the bank--which acquired Bear Stearns Cos. and Washington Mutual Inc. during the financial crisis--misled investors about the quality of the underlying mortgages that were tied to mortgage-backed securities issued by Bear and WaMu before the crisis

J.P. Morgan now faces a potential settlement tab of up to $11 billion after U.S. Attorney General Eric Holder rejected the bank's offer of a $3 billion payment to end criminal and civil charges

In the first half of the year, the biggest U.S. banks were able to offset weak results in their consumer businesses with strong trading revenue

But that ended in the third quarter as slumping bond markets and low volumes led to a decline in fixed-income trading, one of J.P. Morgan's traditional strengths

Revenue from fixed income markets was $3.44 billion, down 7.7% from the year earlier

Meanwhile, equity markets revenue was $1.25 billion, up 20% from the year earlier

Mortgage revenue is another area in which J.P. Morgan was expected to suffer

For the third quarter, mortgage loan originations were $40.5 billion, down 14% from the prior year and 17% from the second quarter. J.P. Morgan had previously said it expects to lose money on its mortgage-origination business in the second half of the year, and that mortgage originations are on pace to drop as much as 40% from the first half of the year

Still, mortgage banking profit was $705 million, up 13% from the prior year, driven by lower provision for credit losses and noninterest expense

The bank in its third-quarter results highlighted several positive signals from consumers and businesses. Average loan balances in the commercial banking unit were $131.6 billion, up 8% from a year earlier and flat from the prior quarter

Commercial banking recorded a profit of $665 million, down 3.6% from a year earlier but up 7.1% from the second quarter

The consumer and community banking arm--the unit that deals with customers who have checking accounts and credit cards--recorded a profit of $2.7 billion, a 15% rise from the year earlier and a 13% decline from the prior quarter

J.P. Morgan like most banks had been reining in costs--along with improved credit quality--as a way of making up for sluggish revenue growth

But for the latest period, J.P. Morgan said its noninterest expense rose 54% from a year earlier to $23.63 billion

The bank has also been cutting staff after, earlier this year, outlining plans to eliminate 17,000 jobs by the end of next year--giving it the smallest headcount among its peers--and reduce expenses by at least $1 billion annually

Headcount dropped by 4,103 from the third quarter a year earlier to 255,041

The bank's credit-loss benefit totaled $543 million, versus a provision of $1.79 billion a year earlier and $47 million in the second quarter
Scaling back the amount of money set aside to cover future losses bolsters net income but doesn't reflect core earnings growth. Investors haven't been pleased that the big banks continue to rely so heavily on improving credit conditions, and their attendant release of reserves, to pump results