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Investors reacted favorably to Dow-30 component JPMorgan Chase’s (JPM - Free JPMorgan Chase Stock Report) good June-quarter earnings report, despite continued losses in the company's mortgage business. The stock, which had pulled back from the 12-month high reached this spring, advanced about 3% just after the market opened.

The company, one of the largest U.S.-based banks, earned $1.27 a share in the June quarter, modestly higher than our estimate of $1.20 and well ahead of the $1.09 reported for the year-earlier period. Reported results included a net $0.07 a share of negative items, with mortgage foreclosure and litigation costs offsetting the positive effect of reductions in credit card loan loss reserves and securities gains.

Results reflected solid performances across most of JPMorgan's businesses. Investment banking profits remained very healthy, reflecting strong fee revenues, continued strength in market-related income, and lower credit and compensation expenses. The retail banking operation turned in a good underlying performance, but mortgage related costs depressed the division's results. Credit card services profits, though aided by the lower loan loss reserves, moderated from the high levels of the past two quarters. Card sales volume rose, but credit card loan balances fell, reflecting the sale of the Kohl's (KSS) card portfolio on April 1st, high repayment rates, and the continued runoff of card loans acquired in the purchase of Washington Mutual in 2008. The commercial banking, treasury & securities services, and asset management operations – smaller but fairly steady contributors to consolidated results – performed well.

Looking forward, the company faces a number of headwinds in the back half of 2011. At the credit card business, loan balances probably will continue to decline and releases of loan loss reserves are likely to moderate. In retail banking, management expects December-quarter results to reflect the full $1 billion annual impact of new rules limiting debit card fees that take effect on October 1st. In addition, the company estimates the costs of repurchasing mortgages from government sponsored enterprises in the second half to run around a $1.2 billion annual rate. Foreclosure costs probably will also remain high. Although JPMorgan believes it is adequately reserved for mortgage related matters, it acknowledged that it will be some time before the mortgage situation is resolved. As a result, we are trimming our share-net estimates for 2011 and 2012, each by $0.25, to $4.75 and $5.25 respectively.

By mid-decade, earnings should benefit from eventual resolution of mortgage matters, the positive effect of higher interest rates on spread income, further credit-quality progress, and initiatives to expand JPMorgan's international and middle-market lending businesses. Patient investors may want to consider the stock for its good total return potential, enhanced by the recently increased dividend payout.


About The Company: JPMorgan Chase & Co. is a global financial services firm offering a variety of services with operations in over 60 nations. At the end of 2010, JPMorgan held $2.1 trillion in assets and operations. 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.