JP Morgan warns of credit card woe as it loses $1.3bn

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JP Morgan Chase, one of the biggest high street banks in the US, warned yesterday that over-stretched borrowers are struggling not just with their mortgages but also now with credit card bills and car loans.

The company sharply increased its reserves to cover the cost of bad loans, and Jamie Dimon, the chief executive, said that 2008 was going to be an extremely challenging year for the retail banking industry.

His comments came as JP Morgan revealed that the investment banking side of the business had been less severely affected by the collapse of the mortgage derivatives market than many of its peers. Where long-time rival Citigroup had admitted losses of $18.1bn (£9.2bn) a day earlier, JP Morgan said it would be writing down the value of its mortgage-backed assets by $1.3bn. That was less than many analysts had forecast, and gave the lie to the rumours of big losses that had pushed JP Morgan shares down.

Yesterday, they snapped back, up more than 7 per cent by lunchtime, and restored some confidence to the broader US stock market.

Overall, JP Morgan posted a profit of $2.97bn for the final three months of 2007, down 34 per cent on the year before. Mr Dimon said the diversified nature of the group had helped keep the decline to a minimum, since profits in the asset management business and continued modest growth in the Chase retail bank helped offset the 88 per cent fall in investment banking profits.

The company said it would put aside an additional $2.54bn to cover loan losses, more than double the figure for the fourth quarter of 2006 and also up sharply from the $1.79bn in the previous three months.

Mr Dimon said that increasing numbers of US borrowers were getting into arrears, particularly in areas of the country where declining house prices have thrown people's personal finances into difficulty.

"On all consumer credit – auto loans, home loans, sub-prime mortgages, credit cards – where home prices are down, delinquencies and charge-offs are up," Mr Dimon said. "We remain extremely cautious as we enter 2008. If the economy weakens substantially from here it will negatively affect business volumes."

Analysts warned that investors needed to move beyond relief that the investment banking business stayed in the black in the fourth quarter. "JP Morgan is exiting one set of problems and writedowns in one part of the company but now must face more significant issues in the other half," Deutsche Bank analyst Mike Mayo told clients.

Wells Fargo, the sixth-largest bank in the US, also reported financial results yesterday, and put aside $1.4bn in extra cash to cover bad debts. "We expect the environment to remain challenging in 2008, particularly in the consumer sector," said John Stumpf, its chief executive.