JPMorgan Chase & Co. (JPM) Earnings Preview: Q3 Earnings Down As Litigation Issues Continue, But Bank Remains Top Pick

JPMorgan Chase & Co. (NYSE:JPM), the nation’s biggest bank by assets, is expected to report a 7 percent decline in profits for the third-quarter as it takes a combined $1.29 billion charge against earnings for the London Whale fiasco and “illegal credit card practices.”

The New York-based JPMorgan, which will report third-quarter earnings on Friday, is expected to report a loss of $1.89 billion, or $1.29 per share, compared with $2.7 billion profit, or $1.40 per share, in the year-earlier period. Revenue is expected to be $24.06 billion compared with $25.86 billion in last year’s third quarter, according to analysts polled by Thomson Reuters.

The Jamie Dimon-led bank will see all of its third-quarter earnings wiped out and then some as the bank looks to negotiate a settlement of criminal and civil charges with federal regulators and the Department of Justice.

Aside from the writedowns from legal difficulties, several parts of JPMorgan’s business have suffered in the recently- completed quarter. Rising interest rates have hit its mortgage business. The 30-year fixed mortgage rate was 4.22 percent last week, but one year ago it stood at 3.36 percent, according to Freddie Mac. As a result, refinancing activity has plunged since early May, and demand for loans to buy a home has fallen.

Last month, CFO Marianne Lake said the bank expects losses in the third quarter in its mortgage origination business that “will more than offset the $1.5 billion or so of consumer reserve releases.” Reserve releases are sometimes used by banks to improve the appearance of their performance.

She said the bank’s third-quarter reserve releases will be roughly $1.5 billion on bad debts, but suggested these releases would be at least 100 percent offset by charges for litigation and regulatory risk. Given recent press reports, it appears JPMorgan could face between $1 billion and $12 billion of regulatory fines.

JPMorgan’s trading revenue also fell last quarter. According to a Citigroup Inc. (NYSE:C), such revenue is is likely to be weaker than expected in the third quarter as investors remained on the sidelines, lowering trading revenue by roughly 13 percent compared to the third quarter of last year.

“We believe revenues are coming in softer than expected. Hopes for a solid trading month in September failed to materialize as volumes remained subdued when the U.S. debt ceiling came into focus in mid-September and increased macroeconomic uncertainty,” explained Citigroup’s note. “We see core FICC (fixed income, currencies and commodities) revenues declining 26 percent year-over-year on average for the group.” The note also estimates investment banking revenues will be down 4 percent, year-over-year, driven by weaker debt capital markets and equity capital markets activity.