JPMorgan's profit plunges as credit costs spike on economic uncertainty

New York(CNN Business) JPMorgan Chase, the nation's largest bank, reported a 51% plunge in second-quarter profits as provisions for credit losses spiked and the shape of the recovery became increasingly uncertain.

Although JPMorgan's (JPM) Main Street business has stumbled during this recession, the bank's trading division is thriving as markets have sharply recovered from the crisis.

JPMorgan reported second-quarter profits of $4.7 billion, down from $9.7 billion a year ago. Yet per-share earnings only fell to $1.38, easily beating Wall Street's expectations. Revenue jumped 15% to a record $33 billion, topping estimates.

Jamie Dimon, JPMorgan's CEO, struck a cautious note about the road ahead.

"Despite some recent positive macroeconomic data and significant, decisive government action, we still face much uncertainty regarding the future path of the economy," Dimon said in a statement. "However, we are prepared for all eventualities as our fortress balance sheet allows us to remain a port in the storm."

CFO Jennifer Piepszak said the bank is prepared for double-digit unemployment through the first half of next year. That would be far worse than the Federal Reserve's projection for the unemployment rate to drop to 9.3% by the fourth quarter of this year.

JPMorgan said provisions for credit losses totaled $10.5 billion during the quarter, up from just $1.2 billion the year before. Most of that was caused by reserve builds of $8.9 billion as the bank braces for loans to go bust in the coming months. This marks an acceleration from the first quarter, when JPMorgan reported credit costs of $8.3 billion, including reserve builds of $6.8 billion.

JPMorgan said the surging reserve builds during the second quarter "reflect further deterioration and increased uncertainty in the macro economic outlook as a result of the impact of Covid-19."

JPMorgan shares, which have lost nearly one-third of their value this year, were flat on Tuesday.

JPMorgan reported firmwide average loans of $998 billion, up 4% from the year before. Deposits spiked 25% to $1.9 trillion.

Consumer division suffers a loss

Analysts have warned the results from banks will be "really ugly" because the industry is being slammed by a perfect storm of problems during the pandemic. Lenders are grappling with mass unemployment, surging bankruptcies and the uncertain health crisis. Plus, bank profits are shrinking because of extremely low interest rates.

Wells Fargo (WFC) reported Tuesday its first quarterly loss since 2008 and signaled an 80% dividend cut — the first big bank to do so.

Citigroup (C), on the other hand, beat earnings expectations as swelling credit costs were offset by strong trading revenue.

JPMorgan's consumer banking division swung to a loss of $176 million, compared with a strong profit of $4.2 billion the year before. The red ink was driven by shrinking revenue and a jump in provisions for credit losses, largely around the bank's credit card business.

Actual credit losses were minimal, however. JPMorgan reported $1.3 billion in net charge-offs, flat from a year ago.

JPMorgan executives said this recession is abnormal because of the high level of stimulus support from the government, which has helped raise Americans' personal income.

"May and June are really the easy months in terms of what this recovery will look like," Piepszak said on a call with reporters. The real damage, she said, would become evident in the coming months.

Market boom pads JPMorgan's bottom line

Although Main Street is struggling, Wall Street is enjoying a rapid recovery from the crisis. US companies raised a record $190 billion via stock sales during the second quarter, according to Dealogic. That surge of stock sales, highlighted by the IPOs of software firm ZoomInfo and grocery chain Albertsons, has led to a fee boom for investment banks.

Profits spiked by 85% in JPMorgan's corporate and investment bank, which reported record revenue of $16.4 billion. Investment banking fees soared 54% amid the flurry of deals.

JPMorgan's trading business was another bright spot. Markets and securities revenue surged 77%, led by a 99% spike in the fixed income arm. JPMorgan cited widespread strength, especially in interest rates, currencies, credit and emerging markets.

However, the bank warned that markets revenue won't stay this strong.

Dimon said the amount of capital being raised by companies "will definitely come down" and trading revenue will likely get cut in half during the third quarter.

"We don't assume we have these unbelievable trading results going forward," Dimon said.

While the bank's transition to working from home has been successful, with investment banking and trading revenues soaring, Dimon said he does not envision most staff staying remote long term. About 20% of traders are back in the company's offices.

"My guess is one day we'll all be back at work and a percentage — let's call it 10% — might be done at home," Dimon said. "I think there are huge benefits to people being together for their creativity."