MSM: JP Morgan 36% profit surge highlights split between Wall St and Main St

(Guardian) – The US bank JP Morgan gave a glimpse of a widening rift in fortunes between Wall Street and Main Street as lucrative business on the financial markets pushed its profits up by 36%, despite worsening defaults on its credit cards and home loans by recession-hit grassroots customers.

After recently repaying $25bn of emergency aid from the US government, JP Morgan’s quarterly profit jumped from $2bn to $2.7bn (£1.6bn). The figures came hot on the heels of booming profits for Goldman Sachs on Tuesday, fuelling optimism that the worst effects of the financial crisis may be over for the banking industry.

JP Morgan’s earnings beat analysts’ forecasts and pushed stockmarkets on both sides of the Atlantic into positive territory. The bank’s chief executive, Jamie Dimon, said he was pleased with the figures against a difficult economic environment.

Dimon sounded a cautiously optimistic note on the outlook: “While we do not know if the economy will deteriorate further, we feel confident that, with our strong capital and reserve levels and significant earnings power, we can continue to reinvest in our business and do well for our clients, communities and shareholders over the long term.”

Employing 220,255 people worldwide, JP Morgan proved itself to be one of Wall Street’s more robust banks during the credit crunch. With the support of the US government, it bought the remnants of fallen rivals such as Bear Stearns and Washington Mutual.

In the group’s core investment banking operation, profits more than tripled from $394m to $1.47bn as competition waned and the markets recovered, providing fertile ground for underwriting and trading on the debt markets. Since touching a 10-year low in early March, the Dow Jones industrial average has recovered by 30% and liquidity has begun to return to once frozen credit markets.

Earnings from JP Morgan’s retail financial services arm all but evaporated, dropping from $503m to just $15m, as falling house prices hit mortgages. The group’s credit card division lost $672m against a $250m profit a year ago as US unemployment worsened, leaving customers struggling to pay their bills. The bank set aside $4.6bn to cover credit losses on cards, an increase from last year’s $2.4bn.

Isabel Schauerte, an analyst at the Boston-based consultancy Celent, said: “While all is quiet on JP Morgan’s investment banking and trading fronts, the bank’s traditional banking business has produced more dire results.”

She said a recurrent theme had emerged in the financial industry: “The economic hardships of Main Street which – despite solid investment banking results – pressure the bottom lines of banks with sizeable exposure to consumer lending and card services.”

The speed of Wall Street’s return to profitability has ruffled feathers politically with concerns in some quarters that bankers may default to taking unsustainable risks in return for huge bonuses.

Richard Ferlauto, head of corporate governance for the American Federation of State, County and Municipal Employees union, said public momentum was growing for reform in Wall Street pay. “There’s a very large political constituency out there who want top see pay reform,” he said.

Banks risked becoming a “subject of scorn” if they hand out multimillion dollar pay packages for short-term profits when “economic conditions haven’t turned around yet for most of the public”.

JP Morgan’s chief executive acknowledged that remuneration was likely to return to pre-crisis levels. “It’s just going back to where it was,” said Dimon. “We will be facing the real compensation issues when we get to the end of the year.”

Dimon has won praise for his management of JP Morgan through the financial crisis. The firm is among the few US banks which never ran into significant financial danger, although it was obliged by the government to accept an injection of public funds. Dimon pushed hard to repay the money early in order to escape curbs on bonus payments, dividends and the recruitment of foreign staff.

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