JPMorgan Crushes Estimates, but the Market Yawns


Whale? What whale? JPMorgan Chase (NYS: JPM) posted a spectacular third quarter, helping to fade the ugly memory of the notorious derivatives trading loss that warped its previous quarter. The bank blew past estimates by posting record net income of $5.7 billion, or $1.40 per share -- a 34% climb from the same period of 2011. Most of its key business segments saw significant gains, recording double-digit percentage increases from the previous year. Yet, the company's stock didn't budge.

A badly needed victory
JPMorgan Chase is a company that was badly in want of a win. The bank's misadventures in derivatives trading really knocked its reputation -- how could they not? That costly gamble (effected by a trader with too much power with the uncomplimentary nickname of the London Whale) resulted in a scary $5.8 billion loss; the company still somehow managed to turn a profit during that quarter, but not by much. In 3Q it was still paying for its mistake, booking a $449 million loss on that series of trades. That's still a sizable number, but it's not as bad as JPMorgan's previous guidance indicated it could be -- the company said the loss might total $800 million-$1.6 billion.

Meanwhile, most of the bank's cylinders seem to be firing well and the engine's cranking. At its core, JPMorgan is essentially an investment bank planted onto a commercial lender, so raking in bucks by wheeling and dealing is what it does best (or should be, anyway). In this respect, it had a fine quarter, with its investment bank operations bringing in nearly $6.3 billion in revenue and netting $1.6 billion. Those numbers were both negative (surprise!) in the disastrous second quarter; they were also in the red in the third quarter of 2011.

There are some very encouraging figures inside those results. The all-important investment banking fees saw a big year-over-year leap, from 3Q 2011's $390 million to $1.4 billion this quarter just past. Even better was the company's take from fixed income markets, which leaped more than tenfold over the same period from $357 million to almost $3.7 billion. Equity markets raked in over $1 billion, miles ahead of last year's loss of almost $500 million.

Retail banking is doing just fine, thank you very much. All of Morgan's numbers in this segment were well in the black and high. Net interest income of $3.9 billion for the period was a big contributor to the $8 billion in total revenue for that end of the business; both figures were negative last quarter. This allowed for a $1.4 billion net profit and a margin of nearly 18%.

Although not the mortgage player some of its rivals, like Wells Fargo (NYS: WFC) , are, Morgan still does plenty of business lending to homeowners. Activity in this area wasn't as impressive as in investment and retail banking, but still it improved. Loan originations were up 8% over 2Q, coming in at $47.3 billion. That number looks better on a year-over-year comparison with a 29% improvement. All told, in the mortgage production and servicing sphere, the company booked a $563 million net profit, loads better than the $41 million it lost last quarter.

Playing to a tough audience
Those results were excellent on many levels and would be the envy of most banks, but the market wasn't impressed. As of this writing, JPMorgan Chase's shares were down by about 1.6%, a steeper dive than that of the Dow overall. What could be the problem?

Maybe it's the question marks hanging over recent personnel moves, in which several longtime executives have jumped (or were pushed) out of the company in the wake of the derivatives misadventure. Or marginalized from their former positions, like the apparently soon to be ex-CFO Douglas Braunstein. Alternatively, it could be the fairly snappish way the famously blunt CEO Jamie Dimon answered questions from reporters and analysts following the unveiling of the third-quarter results. He sidestepped the Braunstein question and, perhaps more worryingly, refused to address queries about the future of his very generous salary, especially considering that he previously took the bullet for the derivatives loss.

No, it's probably because investors (and the broader American public, come to think of it) are still very wary of banks. The derivatives accident is still a fresh and painful memory, particularly for shareholders, and many don't seem convinced that the bank has really turned the corner and insulated itself sufficiently against such risks. And the global financial meltdown, which originated with investment banks such as Morgan, isn't far enough in the past.

Any bank bulls out there?
So perhaps this provides an opportunity to load up on the stock of improving banks. Like JPMorgan Chase, Wells Fargo's shares dipped after that company posted results. They weren't as spectacular as those of the former, but they did indicate improvement in crucial areas (particularly net profit, which was also a record).

Meanwhile, both Bank of America (NYS: BAC) and Citibank (NYS: C) are to report 3Q earnings next week, and unless they show stunning growth, their stocks will likely perform similarly. The same can probably be said of JPMorgan's financial services cousin Morgan Stanley (NYS: MS) , which also reports then.

It'll be interesting to see if any of the above can produce the smashing quarter JPMorgan Chase did... but we shouldn't expect huge immediate price leaps for their stock if they do.

To learn more about the most-talked-about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.

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Eric Volkman has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Motley Fool newsletter services recommend Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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