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JPMorgan and Wells Fargo post lower profits (Reuters)

By Elinor Comlay and Jonathan Stempel 13 minutes ago

NEW YORK (Reuters) - JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N) posted better-than-expected earnings on Wednesday despite higher credit losses, underlining their standing as among the strongest big banks in the battered U.S. financial sector.

Third-quarter profit fell 84 percent at JPMorgan, which bought Washington Mutual Inc's (WAMUQ.PK) banking units for $1.9 billion late last month. Profit dropped 25 percent at Wells Fargo, which is buying Wachovia Corp (WB.N) in a transaction originally valued at $15.1 billion.

JPMorgan and Wells Fargo are betting they can handle the risks stemming from their acquisition targets, which were felled by losses tied to home loans.

Both banks are well-capitalized and are adding deposits as nervous customers flee weaker rivals. They are receiving even more capital as part of the U.S. government plan to inject $250 billion into the financial system.

"People are realizing there are interesting tools being put in place to deal with the credit crisis, but there's going to be a lag time to get them to work," said Arthur Hogan, chief market analyst at Jefferies & Co in Boston.

Shares of both banks fell in pre-market trade after a government report showing disappointing September U.S. retail sales heightened recession fears. But at mid-morning JPMorgan was up 63 cents to $41.34, while Wells Fargo added 58 cents to $34.10.

JPMORGAN

Profit at New York-based JPMorgan tumbled to $527 million, or 11 cents per share, from $3.37 billion, or 97 cents, a year earlier.

Excluding one-time items, the bank had a loss of 6 cents per share, compared with the average analyst forecast for a loss of 29 cents, Reuters Estimates said. Net revenue fell 9 percent to $14.74 billion, topping the average forecast of $14.62 billion.

JPMorgan nearly tripled the amount it set aside for credit losses, to $6.66 billion, including a $1.98 billion adjustment related to how Washington Mutual accounted for loan losses.

Results also included losses of $642 million on Fannie Mae (FNM.N) and Freddie Mac (FRE.N) preferred stock, and $248 million to buy back auction-rate securities.

The acquisition of Washington Mutual, once the largest U.S. savings and loan, gave JPMorgan Chief Executive Jamie Dimon some 5,400 branches and fulfilled his longtime goal of expanding to the western United States.

With $2.25 trillion of assets, JPMorgan may have surpassed Citigroup Inc (C.N) to become the largest U.S. bank for now. Citigroup reports quarterly results on Thursday.

JPMorgan said, though, that quarterly mortgage and home equity losses could top $1.5 billion early next year. The bank is absorbing an estimated $31 billion of loan losses from Washington Mutual, and Dimon said overall earnings might be "reduced" over the next few quarters.

"We necessarily need to be prepared for a bad environment," Dimon said on a conference call. "We don't necessarily know what the environment will be."

WELLS FARGO

At San Francisco-based Wells Fargo, profit dropped to $1.64 billion, or 49 cents per share, from $2.17 billion, or 64 cents, a year earlier. Revenue rose 5 percent to $10.38 billion, while expenses fell 3 percent.

Analysts on average expected profit of 34 cents per share on revenue of $11.08 billion. Results included $646 million of charges related to Fannie Mae and Freddie Mac preferred stock and to Lehman Brothers Holdings Inc's (LEHMQ.PK) bankruptcy.

Wells Fargo's largest investor is Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N).

The bank set aside $2.5 billion for credit losses, in large part for consumer credit losses, while net charge-offs more than doubled to $2 billion. It said home equity loan losses will be higher than normal until home prices stabilize.

"The economy is weak and maybe is in a recession," Chief Financial Officer Howard Atkins said in an interview. "I don't know how deep or how long it will last, but it is a good working assumption. Having said that, the steps taken by the government will help over time, and we'll see what happens."

Wells Fargo was able to wrest Wachovia from the arms of Citigroup largely because it never dove deeply into the risky mortgages and exotic debt that strangled Wachovia, Washington Mutual and IndyMac Bancorp Inc (IDMC.PK).

The Wachovia merger is expected to close this quarter and create the fourth-largest U.S. bank, with more than $1.4 trillion of assets and about 6,600 branches.

"We're known and admired for our conservative financial position and a disciplined acquisition strategy that will not change," Chief Executive John Stumpf said in a statement.

Separately, Paramus, New Jersey's Hudson City Bancorp Inc (HCBK.O) said third-quarter profit rose 64 percent to $121.9 million, or 25 cents per share, from $74.4 million, or 15 cents, a year earlier, as its home lending business thrived.

Hudson City will become the nation's largest thrift following the expected sale of Sovereign Bancorp Inc (SOV.N) to Spain's Banco Santander SA (SAN.MC).

(Additional reporting by Joseph A. Giannone and Ellis Mnyandu; editing by John Wallace)

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