JPMorgan quarterly profit rises, loan book grows (Reuters)

NEW YORK (Reuters) – JPMorgan Chase & Co posted a higher-than-expected jump in second-quarter profit as it wrote off fewer bad mortgages and credit card loans.

The second-largest U.S. bank managed to make new loans faster than customers paid off existing ones during the quarter, a reversal from the first quarter and a bright spot for a sector long plagued by weak loan demand.

JPMorgan's revenue rose and it added staff, and its shares were up 2.75 percent in afternoon trading.

But the bank still faces stiff headwinds, including big expenses from mortgages as the effects of the housing crisis linger.

Foreclosures could take another 12 to 18 months to start declining, Chief Executive Jamie Dimon said on a conference call with reporters.

"JPMorgan's revenue growth is a sign that things are getting better. They're just not getting better quickly," said Ralph Cole, portfolio manager at Ferguson Wellman Capital Management in Portland, Oregon. Ferguson Wellman owns JPMorgan shares.

Although loans at the end of the second quarter were up from the end of the first quarter, average loans outstanding during the latest quarter declined, signaling that even if loan demand is improving, growth is uneven.

JPMorgan is the first major U.S. bank to post quarterly results, and its performance gives hints about how other banks fared in the period.

BOND TRADING

Bond trading revenue fell 18 percent from the first quarter, but the decline was less than some investors had feared. Shares of investment banks Goldman Sachs Group Inc and Morgan Stanley rose on hopes that JPMorgan's trading results bode well for the sector.

JPMorgan earned $5.43 billion, or $1.27 a share, in the second quarter, beating the average Wall Street estimate by 6 cents a share, according to Thomson Reuters I/B/E/S.

The results were up from year-earlier earnings of $4.8 billion, or $1.09 a share.

The bank benefited from not having to pay a British tax on bonuses. In the year-earlier period, that tax reduced profits by $550 million, or 14 cents a share.

JPMorgan made more loans during the quarter, net of customer loan repayments. Its loan book grew to $689.74 billion at the end of the quarter from $686 billion at the end of March as increased business lending offset a 2 percent decline in consumer lending.

The bank also gathered more deposits during the quarter; deposits surged by 5 percent from the first quarter to $1.05 trillion. Chief Financial Officer Douglas Braunstein said mid-sized companies delivered much of the money.

Deposits could support more loans in the future, if there is enough demand.

Shrinking loan books and low interest rates since 2008 have made it difficult for banks to post profits, or increase them. A large part of earnings over the past year has come from setting aside less money to cover bad loans, or dipping into funds previously set aside.

Many analysts are hoping banks will start to post loan growth in the coming quarters, which would be a sign of sustainable increases in profits.

Dimon, who is famously blunt, seemed optimistic about the outlook for profits. He said the bank will build capital levels in the coming months, and criticized regulators for not allowing it to return those funds to shareholders faster.

"God knows why we have to hold all that capital," Dimon said, adding that banks' capital ratios are going "to drive up so fast people are going to be surprised."

Banks returned billions of dollars of capital to investors in 2007 and 2008, even as large clouds gathered over the mortgage market.

JPMorgan reduced the expense it recorded for credit costs to $1.81 billion in the second quarter from $3.36 billion a year earlier. However, that was up from $1.17 billion in the 2011 first quarter.

JPMorgan shares were up 2.75 percent to $40.71 in afternoon trading following the results. Stocks rose in early dealings on the bank's strong earnings but later pulled back.

TAKING TIME WITH MORTGAGES

Dimon said in the earnings announcement that mortgage costs were down slightly, but cautioned that the housing market was still working through difficulties.

"Unfortunately, it will take some time to resolve these issues and it is possible we will incur additional costs along the way," he added.

In a sign of the lingering difficulties that banks are facing with home loans, JPMorgan said it expects to have to repurchase $3.6 billion of mortgages that it packaged into bonds. Such repurchases are usually because a bank failed to properly collect payments on the mortgages, or should never have sold them to investors in the first place.

JPMorgan said it added $1.3 billion to its litigation reserves, mainly for mortgage-related matters. It also continued to add to its loan reserves for losses on mortgages.

"It is possible we are very over-reserved in mortgage land," Dimon said in a conference call with analysts.

He expects to win a legal battle with the Federal Deposit Insurance Corp over liabilities left from busted lender Washington Mutual, pieces of which JPMorgan bought in a government-arranged deal during the financial crisis.

Credit card delinquencies are improving so quickly that the bank drew down its reserves for losses on those balances, adding 15 cents a share to second-quarter profit.

The charge-off rate for uncollectable card debt will be down to about 4.5 percent this quarter, nearly a year earlier than previously expected, said Chief Financial Officer Douglas Braunstein. The improvement echoed comments Wednesday from card lender Capital One Financial Corp.

(Reporting by David Henry; editing by John Wallace)

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ECB signals more rate rises to come, helps Portugal (Reuters)

FRANKFURT (Reuters) – The European Central Bank raised interest rates for the second time in three months on Thursday and signaled a further hike is likely this year to tackle inflation despite the intensifying euro zone debt crisis.

The ECB also offered help to hard-pressed Portugal after ratings agency Moody's downgraded its debt to junk status this week, pledging to keep providing it with liquidity regardless of ratings.

On Greece's debt troubles, President Jean-Claude Trichet stuck to the bank's view that any rescue should not trigger a default or a payout in credit insurance, a stance that pushes the problem back to governments.

"We will continue to monitor very closely all developments with respect to upside risks to price stability," Trichet told a news conference after the bank raised interest rates by 25 basis points to 1.5 percent -- its second rise this year.

Economists said beforehand that use of that phrase would signal a further rate rise in 2011, likely to be in the last three months of the year.

"Today's news conference has made crystal clear that the ECB remains geared toward further monetary tightening, despite the lingering debt crisis," said ING economist Martin van Vliet.

Although financial markets are anxious to know what steps the ECB might take if the euro zone crisis worsens further, Trichet repeatedly refused to discuss them and said he would prefer instead to discuss traditional monetary policy.

Leaving the news conference, Trichet said he hoped next month's briefing would focus primarily on monetary policy rather than "other issues."

The ECB has proved a major stumbling block in agreeing a second rescue plan for Greece as it has threatened to refuse restructured Greek bonds as collateral in its lending operations in the event of a default or a "restricted default," which ratings agencies are threatening to impose.

"We say no to selective default, no to a credit event," Trichet said.

Refusing to accept Greek bonds as collateral would deprive Greek banks of the funds on which they rely, crippling the Greek economy and risking contagion to other euro zone economies. Most economists expect the ECB to baulk at that and keep banks afloat somehow.

Berenberg Bank economist Holger Schmieding said Trichet did not give a clear answer as to whether the ECB would simply accept a rating agency verdict of 'selective default' or use its own judgment.

"His comments seem to suggest that the ECB would defer to a unanimous verdict of the rating agencies on this. But as he did not answer it fully clearly, the ECB may be leaving a little escape route open," Schmieding said.

Trichet did, however, in the wake of Moody's Portugal downgrade, join in criticism of the "oligopolistic" role of ratings agencies, saying there way they operated was "not optimal."

Q4 RISE EXPECTED

Euro zone inflation held at 2.7 percent in June, well above the ECB's target of just under 2 percent and Trichet said the bank's interest rates remained accommodative even after Thursday's increase.

The rise in the ECB's benchmark interest rate to 1.5 percent was widely expected after the bank's recent reiterations that it was in "strong vigilance" mode -- code traditionally used to signal a hike.

It also raised its subsidiary overnight deposit and borrowing rates in unison, opting not to re-widen its so-called rate 'corridor' this time around, a decision which ensures the rate hike packs its full punch.

"There are hints that the ECB is currently minded to maintain its current pace of monetary policy tightening, which would suggest another 25 basis point interest rate hike to 1.75 percent in the fourth quarter," said Global Insight economist Howard Archer.

JPMorgan economist Greg Fuzesi said: "We expect the ECB to accompany the next set of staff forecasts in September with its "strong vigilance" signal, setting up a 25 basis point move in October."

HELPING HAND TO PORTUGAL

The downgrading of recently bailed-out Portugal's credit rating to junk rattled financial markets on Wednesday and cast new doubt on European efforts to rescue distressed euro zone states without debt restructuring.

The ECB has pledged to keep liquidity flowing to euro zone banks that need it, and Trichet said Portuguese debt would be accepted by the ECB as collateral for now, come what may.

"We have decided to suspend the application of the minimum credit rating threshold ... for the purpose of Eurosystem credit operations in the case of marketable debt instruments issued or guaranteed by the Portuguese government," he said.

"This suspension will be maintained until further notice."

The head of the Portuguese Banking Association (APB), Antonio de Sousa, hailed as "very important" the ECB decision to waive its rules on minimum credit ratings for accepting Portuguese debt as collateral for its loans to banks.

(Editing by Mike Peacock)

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Manufacturing rises but consumers remain wary (Reuters)

NEW YORK (Reuters) – The pace of growth in manufacturing picked up for the first time in four months in June, surprising investors and fueling optimism the recent economic slowdown will be temporary.

A separate survey showed that although lower gasoline prices helped temper the gloomy mood among consumers last month, their expectations for the economy remained bleak.

The manufacturing report eased fears that the economic recovery could remain sluggish, though some economists cautioned it was too soon to tell if economic growth had turned a corner.

Many economists and the Federal Reserve, which ended its latest round of monetary stimulus on Thursday as the second quarter ended, have maintained the obstacles to growth in the first six months of the year were temporary.

The Institute for Supply Management said its index of national factory activity rose to 55.3 from 53.5 the month before, when it had slumped to its lowest level since September 2009. The reading topped expectations for 51.8, according to a Reuters poll of economists.

A reading above 50 indicates expansion in the manufacturing sector, while a number below 50 means contraction.

"It indicates perhaps the biggest weakness will be in May," said Michael Gapen, chief U.S. economist at Barclays Capital in New York. "It sets the groundwork for acceleration in growth for the second half of the year."

U.S. stocks added to gains immediately following the data, while Treasury prices turned negative and the dollar extended gains against the yen.

Stocks were poised to record their best week in nearly a year as the manufacturing report and other data in recent days helped to dispel the gloom about the economy.

One of the biggest factors behind the increase in the pace of growth was a jump in inventory building by manufacturers, which some economists said could be a sign of confidence that the U.S. economic recovery would speed up later this year.

The employment gauge also rose, but new orders increased only slightly, and exports fell. Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the details of the report were "baffling."

The areas of strength in the ISM report seemed at odds with the drop in new orders in recent months, which could lead to a fall in the main index next month, Shepherdson wrote in a note.

The prices paid index fell to its lowest since August 2010, further easing concerns about inflation.

Although employment prospects looked a bit brighter, the closely watched U.S. payrolls report for June is not expected to show a big pickup in jobs growth. It is due to be released on July 8.

Separate data on the consumer was less encouraging as sentiment worsened in June. Falling gasoline prices stabilized consumers' view of their current economic conditions, but longer-term expectations remained subdued, the Thomson Reuters/University of Michigan survey showed.

While small spending gains can be expected in the second half of the year, the trend is more likely to vary between lackluster and zero than lackluster and robust over the next several years, the survey said.

The final reading for the consumer sentiment index came in at 71.5, down from 74.3 the month before. It was a hair below the preliminary June figure of 71.8 and shy of the median forecast for 71.9.

The survey's barometer of current economic conditions edged up to 82.0 from 81.9 in May. The gauge of consumer expectations fell to 64.8 from 69.5 and below forecasts for 66.6.

Consumers' one-year inflation outlook fell to 3.8 percent from 4.1 percent. But the five-to-10-year inflation outlook inched up to 3.0 percent from 2.9 percent.

A separate measure of future U.S. economic growth fell to a 29-week low in the latest week, according to the Economic Cycle Research Institute, a New York-based independent forecasting group.

The Weekly Leading Index fell to 126.4 in the week ended June 24 from 127.0 the previous week and its lowest point since December 3, 2010.

The index's annualized growth rate also dropped, to 2 percent from 2.9 percent a week earlier, reaching its lowest point since December 17, 2010.

(Additional reporting by Alexandra Alper; Editing by Padraic Cassidy)

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