What JPMorgan's 3rd Quarter Results Mean for Other Banks

JPMorgan Chase & Co. was the first of the major banks to report third quarter earnings. Its results released Wednesday morning beat expectations, with a profit of $1.01 per share versus 90 cents per share expected. Although its profit is down by $377 million or 8% compared to the second quarter, it's up $830 million or 23% compared to a year earlier. What can we learn about general trends in banking from the results?

It helps to start by looking at the bank's various lines of business. Here are two charts. The first shows how the net income of those lines have moved over the past year. The second shows net income changes compared to a quarter ago and a year ago:

JPMorgan 2010-Q3 lines v2.png

JPMorgan 2010-Q3 lines q y v2.png

Let's consider a few of these lines of business.

Investment Bank

Investment banking made a huge rebound last year. The growth continued through the first quarter of 2010, but then began to decline. Principal transactions revenue is down 58% or $1.6 billion year-over-year. The fall over the past few quarters is primarily due to less trading revenue. You can expect to see all big banks with a significant Wall Street presence suffer form the trading slowdown.

Retail Financial Services

JPMorgan's retail bank has been doing relatively well over the past few quarters. This is mostly due to fewer credit losses in products like mortgages. The bank's provision for credit losses has declined by a whopping 61% or $2.4 billion year-over-year. This means banks with a stronger retail presence should fare relatively well in the third quarter.

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Credit Cards Services

Credit card profit is back for JPMorgan, which likely means it's also back for other banks. Despite last year's credit card regulations, card revenue hasn't declined too steeply year-over-year -- it's down 18%. But the bank has more than made up for that decline in revenue with fewer losses expected from credit cards. Those loss provisions declined by 67% or $3.3 billion year-over-year.

Corporate/Private Equity

The other significant change was in corporate/private equity. Those profits are way down compared to a quarter and year earlier. This is mostly a revenue effect, and has little to do with credit losses. The bank made less money from securities gains and interest in the third quarter.

The narrative hear is pretty straightforward. Most of JPMorgan's lost revenue stems from its trading losses and private equity. Meanwhile, its credit loss provisions are way down, as its retail bank and card services in particular are soaring compared to a year earlier. So expect investment banks like Goldman Sachs and Morgan Stanley to have a relatively rough quarter, while more pure retail operations like Wells Fargo and Capital One likely did relatively well.