Consumer Credit Losses at JPMorgan Chase Spell Danger for Weaker Banks

(MoneyWatch)  It's another blow-out quarter for JPMorgan Chase. Yet rising losses in consumer lending augur badly for less healthy banks.

The company announced third-quarter net income of $3.6 billion on revenue of $28.8 billion, compared with earnings of $527 million on sales of $16 billion in the year-ago period.

Investment banking led the way, soaring 85 percent over the prior year, with the company seeing marked growth in equity and debt underwriting. JPMorgan Chase is also starting to benefit from its 2008 acquisition of Washington Mutual. Net income in its commercial banking unit was up 9 percent from a year ago. Net interest income was up 34 percent, which the company said would've been flat without Washington Mutual.

By contrast, fees for advising on mergers and acquisitions and related transactions were down 33 percent. Losses also were up in its credit portfolio, which JPMorgan Chase attributed to mark-to-market declines on retained loans.

Indeed, in a troubling sign for the rest of the industry, JPMorgan Chase is significantly padding its capital buffer to prepare for continuing deterioration in consumer loans. The company added $2 billion to consumer reserves, raising total reserves to $31.5 billion, or 5.3 percent of all loans.

The company reported a net loss of $1 billion in its consumer lending business, up from a loss of $659 million the third quarter of 2008. That decline reflects lower mortgage production revenue, lower loan balances and the company's rising provision for credit losses.

Delinquency rates are up across JPMorgan Chase's consumer lending business, including home equity, credit card, and prime and subprime mortgage loans.

"While we are seeing some initial signs of consumer credit stability, we are not yet certain that this trend will continue," said CEO Jamie Dimon in a statement.

Meaning losses are likely to pile up for most banks as loans continue to degrade. An important gauge of how bad the damage is likely to be comes Friday, when Bank of America reports earnings.