Knowing all too well that today's financial markets are cloaked in paranoia, investors haven't been asking "What have you done for me today?" The prime issue facing banks today is "Are you going to be here tomorrow?"
So while JPMorgan Chase (NYSE: JPM ) reported quarterly net income that plunged from the same period last year, investors are wise to shrug it off and realize the bank is one of the lucky ones to still be a twinkle in Wall Street's eyes.
Second-quarter net income came in at $2 billion, or $0.54 per share, down 55% from the $1.20 per share earned in the same period last year. The results were nipped by the integration of Bear Stearns, which lopped off about $500 million from the bottom line. Revenue slid 3% to $18.4 billion, but easily trounced expectations of $16.55 billion. Credit-loss provisions swelled $1.3 billion, while the firm's investment banking unit took just over $1 billion in write-offs related to leveraged lending and mortgage products. Tier 1 capital -- one of the strongest indicators of a bank's health these days -- increased to $98.7 billion, or 9.1%.
JPMorgan logged a surge in mortgage banking profits for the quarter, coming in at $169 million, or 138% ahead of the prior year, while mortgage loan origination climbed 27% from the year before. What's it doing moving into such a soured segment right now? The mortgage mayhem over the past year has made the market ripe for the picking for banks -- like JPMorgan -- with enough fortitude to jump in the middle of the chaos. Earlier this year, the bank made an offer to acquire Washington Mutual (NYSE: WM ) , which would have ballooned JPMorgan's mortgage exposure, but that deal was turned down (by WaMu management who are no doubt kicking themselves now). Late last month, rumors flew that JPMorgan might be making a run for Wachovia (NYSE: WB ) , another mortgage heavyweight, but the gossip quickly faded.
What this mean for the market?
There are three main banks that are staying one step ahead of the tattered financial sector: Goldman Sachs (NYSE: GS ) , Wells Fargo (NYSE: WFC ) , and JPMorgan. The three banks have two things on their side that are worth their weight in gold right now: they didn't get in over their head with boneheaded lending practices, and (because of that) they've gained the trust and admiration of customers, counterparties, and investors -- a privilege that is second-to-none in surviving the credit crisis.
Sure, there's a mountain of challenges ahead of the entire banking industry, but the three amigos mentioned are some of the only banks that will not only outshine their peers, but can actually swoop in and capitalize on other banks' problems. The adoption of Bear Stearns at an insanely low price is a great example of JPMorgan being able to create a treasure out of someone else's trash.
Will there be more bottom fishing? For hungry shoppers like JPMorgan, acquisitions of troubled peers will provide the blueprint of what's to come of this never-ending financial soap opera.
Until then, check out: