JPMorgan's Financial Results Show A Mixed Picture

The financial media was caught like a deer in the headlights Friday staring into the bright glow from JPMorgan Chase and Co.'s (NYSE:JPM) latest financial results. The headline number, an increase of 34 percent in year-over-year quarterly earnings on higher revenue, was immediately seized as proof that the largest U.S. bank by assets remains untouchable.

At the New York Times, Jessica Silver-Greenberg noted the results showed "strength in consumer and corporate lending." TheStreet.com called it "a very strong third-quarter bottom line." Meanwhile, the Associated Press highlighted the words of JPMorgan CEO Jamie Dimon that he believed the results were driven by a housing market that had "turned a corner."

The consensus, echoed Dimon Friday, who noted "strong performance across all our businesses" but focused on gains from mortage underwriting, was clear: JPMorgan might have only recently been on the news for reckless betting at its in-house hedge fund that led to multibillion- dollar losses, government lawsuits alleging massive fraud in its mortage subsidiary, and the indignity of having Dimon testify before Congress, but this bop clown of American finance had taken all the punches and was back on its feet.

Perhaps the rest of the media was reading a different report, as it appears to that even a cursory look at the bank's financial statements reveals the just-ended period everyone seems to be fawning over was far short of the tomahawk dunk of a quarter everyone is making it out to be.

First, the actual numbers.

JPMorgan, based in New York, reported income of $5.7 billion, more than a third above year-ago earnings of $4.26 billion. But nearly the entire difference came on reduced provision for loan losses in its residential mortgage portfolio, which gave the bank a $900 billion earnings boost. The bank was able stopped losing money from trades in its corporate account as it wound down operations following large losses in the second quarter. In other words, nearly all of the bank's gains came on an accounting maneuver and the fact an internal unit is getting smaller.

More important, while performance of various bank units was better than the dismal third quarter of 2011, when the entire financial sector took a hit on highly volatile financial markets, income from the most profitable units actually declined substantially from the previous quarter.

Profit from the company's investment bank, the largest unit, declined by 18 percent, even after a $48 billion benefit from lower provisions for credit losses was factored in. The bank's second-largest unit, retail financial services, also saw a steep sequential drop in profit of 38 percent, apparently overlooked by analysts touting the increase in mortgage underwriting within that unit. Profits on the bank's credit card and auto loan book also dropped from last quarter, hit by changes in rules on how to account for certain types of delinquent loans.

And income numbers were only part of the story. One quickly overlooked metric in JPMorgan's earnings release showed net exposure to the highly-volatile peripheral economies of Europe nearly doubled in the quarter, going to $11.7 billion from $6.2 billion. The ratio of deposits-to-loans went from 1.53 last quarter to 1.57, and its net interest margin declined, a reflection of increased deposits with the bank, but also a sign that JPMorgan, as the company noted itself on the investor presentation accompanying the release of results is finding "limited reinvestment opportunities."

The real head-scratcher within the bank's results, however, is the fact it gained so much from deciding to hold a smaller provision for credit losses in spite of the fact delinquencies are rising for important sections of its loan book. While long-term bad loans have dropped as the bank has written off or sold them off, the net amount in bad debts actually rose as newer delinquencies on home equity loans, mortgages and credit cards all appear to be trending up.

The profit-boosting move from the banks to lower loss reserves could still make sense if JPMorgan was expecting the delinquencies on loans to drop sharply in the near future. But according to recently released data from the Federal Reserve Bank of New York, that's just not the industry trend, with big banks increasingly eating the bulk of the losses from delinquent loans when compared to their small and medium-sized peers.

Finally, there's the issue with the bank's internal hedge fund, the chief investment office it uses to put some of its excess deposits to work and which was the source of multibillion-dollar losses last quarter. As the bank unwinds trades in that unit and ostensibly puts a leash on its management, one would expect the bank would see risk reduced across the board.

Instead, JPMorgan saw its value-at-risk, a calculation of how much it could expect to lose in a bad trading day given certain parameters, spike up to $112 million, nearly double from $65 million last quarter. And that's in spite of the fact the bank said it had "effectively closed out" the positions that caused so much carnage earlier this year.

Shares of JPMorgan Chase fell 66 cents to $41.44 in late trading. They've gained nearly 25 percent this year.