JPMorgan Gets Stung but Looks Strong

In a tale of two businesses, JPMorgan Chase's (NYS: JPM) investment banking activities looked ugly in the third quarter, while most of its traditional banking activities managed to continue clawing ahead.

The headline $1.02 in earnings per share that JPMorgan reported easily topped the $0.91 that analysts were expecting, but the bottom line was helped by a valuation allowance on the bank's debt. When the market value of a bank's debt falls, the theory is that the bank could buy back the debt at a profit, so it is required to record an allowance on its books when that happens. For the third quarter, that added $1.9 billion to JPMorgan's pre-tax profit and $0.29 to its earnings per share, but has little to do with the bank's underlying performance.

Once we back that out, it's clear that to say that "real" earnings per share were basically flat from last year's $1.01 is, well, flat wrong.

What went wrong
Traditional banking is boring. When done right, a bank isn't going to see huge swings in its results from quarter to quarter and though it is a cyclical business, a downturn should generally mean a dip, not a collapse.

Investment banking, on the other hand, is a much more thrilling business -- or frightening if you don't like drastic swings. When trading operations go right, they can go very right, but when they go wrong, it can be ugly. Likewise, when capital markets are healthy, companies are raising money and making deals, the income from advisory services can be huge. When capital markets are testy -- as they have been lately -- that can all dry up pretty quickly.

Volatility and declining markets made for a more challenging trading environment during the third quarter, and that shows particularly when we pull out those debt valuation allowances (which show up in trading). Fixed income revenue was down 34% from last quarter and equity markets dipped 9%.

Meanwhile, deal volume fell across the board and JPMorgan's advisory fees were down 31% from last year. On the bright side, the bank held on to its strong position in the advisory market, grabbing the No. 1 spot in total third-quarter advisory fees, as well as No. 1 in bonds, No. 2 in equity, and No. 3 in mergers and acquisition advising.

And the rest
Apart from the ugly quarter for investment banking, JPMorgan's results didn't look bad at all. The traditional banking businesses -- retail and commercial banking and credit cards -- looked to be moving in the right direction for the most part. Credit costs are still at elevated levels, and there were less loss reserves released during the quarter than some analysts were expecting, but the bank seems to be managing these business lines well as we move further out from the financial crisis ground zero.

Overall, coming away from the quarter, it's still perfectly understandable why investors and analysts look at JPMorgan in a completely different light than other U.S. banking giants, particularly Citigroup (NYS: C) and Bank of America (NYS: BAC) .

Looking out more broadly in the sector, JPMorgan's results should be a good guide to what we'll see from other major banks and investment banks. Those that focus more on traditional banking -- Wells Fargo (NYS: WFC) and US Bancorp (NYS: USB) -- are unlikely to bring too many bad surprises, while those more focused on investment banking -- Goldman Sachs (NYS: GS) and Morgan Stanley (NYS: MS) in particular -- will likely have some ugly numbers for the quarter.

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