JPMorgan Earnings "Beat" By 10 Cents, But Key Parts Of The Business Stink, And There Was a Big Accounting Gain (JPM)

JPMorgan Q3 earnings have come in better than expected, at $1.02.

But it's a bank report, so were going to need to look deeper to see if it's good.

The first red flag is the Debt Valuation Adjustment: The company booked a big gain BECAUSE its bonds worsened significantly, meaning technically on an accounting basis, the company's equity jumped. Read an explanation here.

Here's their commentary

Jamie Dimon, Chairman and Chief Executive Officer, commented: “The Firm reported third-quarter net income of $4.3 billion, representing a 13% return on tangible common equity1. It is notable that these results included several significant items(*), including a $542 million pretax loss in Private Equity, $1.0 billion pretax of additional litigation expense in Corporate and a $1.9 billion pretax DVA gain. The DVA gain reflects an adjustment for the widening of the Firm’s credit spreads which could reverse in future periods and does not relate to the underlying operations of the company. All things considered, we believe the Firm’s returns were reasonable given the current environment.”

This is also some useful commentary about the way things are going:

Further commenting on business results, Dimon said: “The Investment Bank’s revenue, excluding the DVA gain, was down substantially; however, we are gratified that the business maintained its #1 ranking in Global Investment Banking Fees, and we believe that we have maintained a healthy share of the global sales and trading market. Retail Financial Services demonstrated good underlying performance, with solid revenue and increased deposits in Consumer & Business Banking and strong retail mortgage origination volumes in our Mortgage Banking business. In our Card business, credit card sales volume, excluding Commercial Card, was up 10% compared with the prior year. Commercial Banking reported continued loan growth, including middle-market loan balances up 18% compared with the prior year, and record deposit2 balances of $180.3 billion were up 31% compared with the prior year. In Treasury & Securities Services, trade finance loans increased 69% to $30.1 billion, and deposit2 balances increased 41% to $341.1 billion. Corporate/Private Equity results were negatively affected by market conditions, the Firm’s decision to take certain positions in its securities portfolio in anticipation of an eventual increase in interest rates, and additional litigation expense.”

Here are the key points from the press release, which you can download here.

Challenging investment banking and capital markets environment; Firm maintained its #1 ranking for Global Investment Banking Fees year-to-dateConsumer & Business Banking reported solid revenue, up 6% compared with prior year, and deposits up 7%; added 60 new branches during the quarterCredit Card sales volume2 up 10%; net charge-offs declined as expectedCommercial Banking reported solid revenue, with strong loan growth, up 9%, and record deposit2 balances, up 31%Treasury & Securities Services reported strong growth in deposit2 balances, up 41%Third-quarter results included the following significant items:(*) $1.9 billion pretax ($0.29 per share after-tax) benefit from debit valuation adjustment (“DVA”) gains in the Investment Bank, resulting from widening of the Firm’s credit spreads$542 million pretax ($0.09 per share after-tax) Private Equity loss$1.0 billion pretax ($0.15 per share after-tax) additional litigation expense, predominantly for mortgage-related matters, in Corporate

Meanwhile, check out these three charts for a deeper understanding of JPMorgan's business right now.

Original post: Stay tuned.

The first big financial earnings report is due out at 7:00 AM ET.

Analysts expect EPS of $0.93 on revenue of $25.3 billion.

We'll have it out.

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PREVIEW: Earnings At 6 Huge US Banks (C, JPM, WFC, MS, GS, BAC)

NEW YORK (AP) — Investors are bracing for a rough earnings season from banks.

Turbulence in stock and bond markets, combined with waning confidence among business and consumers, hurt banks' business in the third quarter. IPOs were shelved, companies postponed plans to sell bonds, and acquisitions were put on ice. Consumers also held back on spending.

The sharp drop in business activity hurt banks, which rely on borrowing by companies and consumers to make money. Most Wall Street analysts lowered their earnings estimates for large U.S. banks.

JPMorgan Chase & Co. will be the first major bank to report results Thursday, followed by Citigroup, Wells Fargo, Bank of America and Goldman Sachs the week after.

The intense global market turmoil during the third quarter has already taken a toll on bank stocks. The KBW index of leading banks plunged 27 percent during the third quarter.

Howard Chen, an analyst at Credit Suisse, estimates that mergers and acquisitions volume in the third quarter plummeted 34 percent from the prior quarter, while stock underwriting sank 54 percent.

Chen said it was the weakest quarter for total debt issuance since the financial crisis. Overall debt and loan underwriting volume fell 27 percent from the previous quarter, leading to a 35 percent decrease in fees.

Worries about Europe's debt problems continued to hang over U.S. banks in the third quarter. Investors expect bank executives to offer more clarification on how exposed the banks are to the crisis when the banks host conference calls to discuss their earnings.

Most large banks have disclosed the amount of European debt they own, but it's unclear how much exposure they have via more complex derivatives trades they conduct with their counterparts in Europe. For example, U.S. banks sell financial contracts that act as insurance to protect against defaults on riskier European bonds.

Growth in U.S. business loans is expected to be a bright spot. According to the Federal Reserve, corporate borrowing grew rapidly during the third quarter. At the 25 largest banks by assets, commercial and industrial loans grew 15 percent, the Fed reported.

Here are the consensus earnings forecasts and highlights for each of the large U.S. banks from analysts surveyed by FactSet:

— JPMorgan Chase & Co. reports Thursday. It is expected to earn 96 cents per share on revenue of $23.6 billion. Considered one of the strongest and most stable among the large banks, analysts expect JPMorgan to grab market share from competitors. However, it might be forced to once again to put aside more reserves to offset costs from increased litigation and repurchasing poorly written mortgage loans.

— Citigroup Inc. reports on Monday, Oct. 17. The New York bank is expected to report earnings of 84 cents per share on revenue of $19.3 billion. Barclays Capital analyst Jason Goldberg reduced his estimates by 11 cents because of weakness in investment banking and the increasingly uncertain global economy.

— Wells Fargo & Co. also reports Monday. The San Francisco bank is expected to earn 72 cents a share on revenue of $20.2 billion. Wells has one of the largest mortgage origination businesses of all banks and will likely have benefited from lower mortgage rates. Rates on 30-year mortgages hit a historic low of 4.08 percent in the third quarter.

— Bank of America Corp. reports Tuesday, Oct. 18. Analysts expect the Charlotte, N.C. bank to report earnings of 26 cents per share on revenue of $25.8 billion. The bank has been battling lawsuits related to mortgages. It paid out $12.7 billion to settle claims in the first half of the year. Its Merrill Lynch investment banking and brokerage division helped lift earnings in the first half of 2011, but Merrill is unlikely not be of much help this quarter because of low trading volumes.

— Goldman Sachs Group Inc. also releases results Tuesday. It is expected to earn 23 cents per share on revenue of $5.3 billion. Chen, of Credit Suisse, is more negative than other analysts on the New York bank. Chen wrote in a report that the difficult market conditions and low appetite for risk among investment banking and trading clients could lead to a third quarter loss of 70 cents a share. If that happens, Chen notes that it would be only the second quarterly loss for Goldman since the bank went public in 1999.

— Morgan Stanley will report on Wednesday, Oct. 19. Analysts estimate it will earn 31 cents per share on revenue of $7.5 billion. A sharp downturn in the investment advisory business is expected to hurt Morgan Stanley. Wells Fargo analyst Matthew Burnell lowered his earnings estimate to 26 cents from 56 cents per share because of weakness in trading. Executives are expected to shed more light on the bank's exposure to European debt and derivatives during their conference call. Worries about Europe have spooked Morgan Stanley investors lately, helping send the stock down 44 percent this year.

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