The Dow Jones closed above the 10,000 mark for the first time in 12 months yesterday as the US banking giant JPMorgan Chase posted forecast-busting earnings for the latest quarter.
A year after spiralling losses in the investment banking arms of Wall Street's major institutions threatened to engulf the financial system, it seems that investment banking profits could be saving US financial firms from weaknesses elsewhere.
JPMorgan Chase, the first major banking conglomerate to report third-quarter earnings, warned that credit card and mortgage customers of its retail banking division were defaulting on their loans in inflated numbers, but that investment banking revenue had rebounded so strongly that the company overall made more money than analysts predicted. Investors pushed the bank's shares up 3 per cent to a year's high, and in the process pushed the blue chip Dow Jones Industrial Average up 1.45 per cent to 10,015.86.
JPMorgan posted net income of $3.6bn (£2.3bn) – 82 cents per share, far above the 52 cents Wall Street had expected. The blockbuster figure contrasts with the $527m in the same quarter last year, when the collapse of Lehman Brothers triggered a financial panic.
A little over $1.9bn of net income was derived from the investment banking side of the business, more than double last year. The firm has been the number one issuer of debt and equity on behalf of corporate clients this year, and it also continued to revel in the exceptional profitability of fixed income trading. With Lehman and Bear Stearns both out of the game, and some other rivals retrenching, the big players that do remain are pocketing more money from wider spreads.
It is a phenomenon expected to be on show in Goldman Sachs' results this morning, and it is one of the main reasons that Wall Street is once again expected to pay boomtime-style bonuses at the end of this year.
JP Morgan investors shrugged off more gloomy news from the retail banking side of the business – which includes the branches acquired when Washington Mutual collapsed last year, as well as the Chase brand – and a sombre outlook statement by Jamie Dimon, the chief executive. The bank put $2bn more into reserves to cover consumer loans it is no longer certain of having repaid. The total now is $31.5bn, 5.3 per cent of the value of all the loans. The company signalled that it warned that the US economy was still uncertain, but hoped the period of adding to these provisions was coming to a close, but warned that the US economy was still uncertain.
"Credit costs remain high and are expected to stay elevated for the foreseeable future in the consumer lending and [credit] card services loan portfolios," Mr Dimon said. "While we are seeing some initial signs of consumer credit stability, we are not yet certain that this trend will continue."
Analysts and traders cheered the results. Michael Holland, the chairman of Holland & Co, called the results "off-the-charts, stellar". He said: "Their fortress balance sheet continues to be the envy of the rest of the banking industry. I don't think you can infer from this that the financial sector is home free at this point. To the contrary, it shows one thing only – JPMorgan has performed brilliantly."Reuse content