JPMorgan Chase & Co reported a 47 percent increase in quarterly earnings, and said loan demand and trading profit could grow this year, boosting investor optimism that revenue for major banks will recover.

Profit and revenue were stronger than analysts had expected, although results were helped by the bank dipping into money previously set aside to cover losses. The bank's shares rose 2.2 percent to $45.43, and lifted the broader banking sector, whose biggest companies will post results next week.

JPMorgan is still wrestling with the aftermath of the mortgage crisis -- it put aside another $1.5 billion to cover legal settlements mainly linked to U.S. home loan foreclosures.

JPMorgan made loans totaling $2.4 billion in the fourth quarter, an increase of 0.35 percent. The bank's chief executive, Jamie Dimon, said on a conference call with investors that demand for credit appeared to be strengthening.

Our early indicators are that we will continue to see loan growth this year, Dimon said.

Dimon shrugged off recent decreases in trading volume across Wall Street, especially in fixed-income, which has been a key engine of Wall Street profits for the last decade.

So far this year, (trading has) started off pretty good, Dimon said, adding that 2011 could be good for trading and sluggish revenue in the business is not a long-term problem for Wall Street.

JPMorgan said profit increased to $4.8 billion, or $1.12 a share, from $3.3 billion, or 74 cents a share, a year earlier. Analysts on average expected $1 a share, according to Thomson Reuters I/B/E/S.

Fewer bad loans meant the bank could reduce loan-loss reserves for its credit card unit by $2 billion, or 30 cents a share after tax.

The loan-loss reserves are something that bugs me, said Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor. I would love to see a bank hit their numbers without taking from loan-loss reserves for once, he added.

Revenue rose 6 percent to $26.7 billion on a managed basis, which adjusts for an accounting change for off-balance sheet entities. That was higher than the $24.37 billion expected by analysts.

The largest U.S. bank, Bank of America Corp, reports results on Friday January 19, while Citigroup, the third largest, reports on Tuesday.

HIGHER INVESTMENT BANKING REVENUE

Revenue at JPMorgan's investment bank rose 26 percent to $6.21 billion. Compensation expense per employee for the full year, a measure of how investment banking bonuses will fare, dropped 2.7 percent to $369,651.

Merger advisory revenue fell 31 percent from the fourth quarter 2009 to $424 million, but Chief Financial Officer Douglas Braunstein said revenue in this area should rise in 2011 because of the large number of deals in the pipeline.

Fixed-income trading revenue, at $2.88 billion, was 5 percent higher than the fourth quarter of 2009 but down 8 percent from the third quarter of 2010.

Some analysts expect Goldman Sachs Group and Morgan Stanley to post 10 percent to 15 percent declines in fixed income trading revenue, so JPMorgan's results could mean the business is not as bad as feared. Goldman Sachs reports results on Wednesday and Morgan Stanley on Thursday.

The bank benefited from a turnaround in its retail banking unit, which reported a profit of $708 million compared with a loss of $399 million in the year-earlier quarter.

Still, JPMorgan had to put aside $1.5 billion for additional litigation reserves related to soured mortgages it sold to investors and homes it may have improperly foreclosed on.

Bank of America Corp last week agreed to pay $2.8 billion to mortgage finance giants Fannie Mae and Freddie Mac to settle claims that it sold bad home loans to them.

Many investors fear that other banks will have to make similar settlement with the two government-backed entities.

JPMorgan shares have lagged the overall banking sector over the past 12 months, up 1 pct from January 14, 2010 compared with a 13.4 pct gain in the KBW Banks index Many of the banks with the biggest credit issues have experienced the biggest share rallies over the last year.

(Additional reporting by Maria Aspan in New York and Dominic Lau in London; Editing by Lisa Von Ahn and Steve Orlofsky)

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