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JPMorgan Chase & Company (JPM - Free Analyst Report), one of the largest banks in the U.S., earned $1.01 a share in the September quarter, an improvement from the $0.80 logged in the year-earlier period, largely due to a 67% decline in its total credit costs. Reported results also compared favorably with our estimate of $0.90.

Changes in various reserve balances had an $0.11-a-share net negative impact on earnings in the period. A reduction in the credit card division's loan loss reserve, reflecting declining card loan charge-offs and delinquencies, contributed $0.22 a share to results, but was offset by an increase in JPM's litigation reserve (which lowered share net by $0.18) and an increase in the retail financial services division's reserve for repurchases of mortgages previously sold to investors (which clipped $0.15 from share net).

The company's underlying performance in the quarter was decent, given the tough operating climate. In the investment banking division, lower revenues due to a weaker performance in the fixed-income business, were partly offset by lower incentive compensation expenses. Retail financial services and credit card profits rose, both aided by lower credit costs. The commercial bank division reported record quarterly revenue. And the asset management business enjoyed strong inflows of investment funds to high-margined products.

Looking ahead, management expects losses on home equity and prime and subprime mortgages of about $1.8 billion in the December quarter compared with the $1.2 billion recorded in the September interim. Retail financial services and card services results in the final period of 2010 will also include the full negative effect of new rules governing overdraft and credit card income, which reduced revenue for only part of the September period.

Given prospects of continued high home loan credit costs and increased pressure on revenues, we are not raising our December-quarter earnings estimate at this time, but our full-year 2010 target increases by a dime, to $3.80 a share, due to the better-than-expected September-period performance. In 2011, financial reform changes may put more pressure on revenues. We are maintaining our 2011 earnings estimate of $4.70 a share.

The stock has good appreciation potential to 2013-2015. JPMorgan's continued investment in branches and sales personnel should position it well to benefit from an eventual pickup in business activity. Meanwhile, the company says it is waiting for further clarification from bank regulators regarding new capital standards before deciding whether to raise the dividend on the common stock, possibly in the first half of 2011.


About The Company: JPMorgan Chase & Co. is a global financial services giant offering a variety of services with operations in over 50 nations. At the end of the first quarter of 2010, there were about 5,155 JPMorgan offices worldwide. Operational divisions include investment banking, treasury & securities services, asset management, commercial banking, retail financial services, card services, and private equity investment. The company had previously merged with Washington Mutual in September, 2008, Bank One in July, 2004, and Chase Manhattan in the final month of 2000.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.