JPM JP Morgan Chase and Co

By Emily Glazer And Peter Rudegeair 

A supersized tax benefit helped J.P. Morgan Chase & Co. report a 22% increase in third-quarter profit, but investors focused on weakness in the firm's trading division.

The largest U.S. bank by assets reported a profit of $6.8 billion, or $1.68 a share. That compares with a profit of $5.57 billion in the same period of 2014. Excluding $2.2 billion of tax benefits and other one-time items, however, earnings came in at $1.32 a share, a nickel shy of the $1.37 a share polled by analysts polled by Thomson Reuters.

Shares dropped 1.3% to $60.75 after hours.

Revenue at the New York fell 6.9% to $22.78 billion, or $23.54 billion on an adjusted basis. Analysts had expected $23.69 billion.

The bank attributed its significant tax benefits to the "resolution of tax audits and the release of deferred taxes." Its effective income tax rate for the third quarter was -1.1% compared with 29.7% a year ago. Chief Financial Officer Marianne Lake said on a call with media that it was related to "a lot of complex tax issues during the financial crisis."

Trading revenue decreased 15% to $4.34 billion from $5.07 billion in the third quarter of 2014. Chief Executive James Dimon said at an investor conference in September that trading results would be "similar" to other banks, following comments from Bank of America Corp. and Citigroup Inc. executives that revenue at their units trading equities, bonds, currencies and commodities were expected to fall about 5% in the third quarter.

Revenue from trading bonds, currencies and commodities fell 23% to $2.93 billion, while revenue from trading stocks rose 9% to $1.4 billion. The bank said in a news release that weakness in trading commodities and credit products such as corporate bonds was partially offset by strength in trading currencies, emerging-market debt and equity derivatives.

Adjusting for revenue declines that the bank expected due to prior decisions to exit some businesses, bond trading revenue fell 11%.

"We were pretty pleased, we went through these very volatile markets," Mr. Dimon said on a Wednesday call with media. "The daily result bounced around a little bit but...that will happen in markets like that."

Ms. Lake added that rates were down slightly but "reasonably solid" and currencies and emerging markets had a lot of volatility but the bank capitalized on the flow.

The bank reported a 4.5% year-over-year rise in investment banking revenue to $1.61 billion for the quarter and reported a 35% drop in equity underwriting fees. Debt underwriting fees, however, rose 17% compared with last year's third quarter, and advisory fees for M&A also rose 22% year over year.

J.P. Morgan extended $29.9 billion in mortgages in the quarter, an increase of 41% from the $21.2 billion the bank extended in the third quarter a year ago. Profits in its mortgage division, one of the largest in the U.S. by volume, were $602 million, up 29% from the $465 million it reported in the third quarter of 2014.

Costs decreased 2.7% to $15.37 billion from $15.8 billion in the third quarter of last year. Banks have been under continued pressure to keep costs in check as interest rates have remained low, which limits the profit margins in lending businesses.

Ms. Lake said on a call with media that the bank will beat its expense guidance of $57 billion for the year, likely to come in closer to $56.5 billion. That's due to more investments in cards marketing and "incremental efficiencies" rather than one big change.

The bank's legal tab totaled $1.3 billion in the third quarter, higher than the $1.06 billion it reported in the same period a year ago and the $291 million it recorded in the second quarter. The Wall Street Journal reported over the summer that J.P. Morgan is expected to settle in coming weeks with the Securities and Exchange Commission and Commodity Futures Trading Commission for more than $150 million regarding whether the bank steered some clients into its own investment products without proper disclosures.

Overall profit at the corporate and investment bank was $1.46 billion, a 13% decrease from $1.68 billion in the same period last year. In the consumer bank, profits were $2.63 billion compared with $2.53 billion in the third quarter a year ago. J.P. Morgan's commercial bank earned $518 million, a 23% decrease from the $671 million it earned in the year-ago quarter, and the bank's asset management unit reported profits of $475 million compared with $590 million in the third quarter of 2014. Ms. Lake added that the increase was related to a "range of matters" including a recent CDS settlement.

J.P. Morgan set aside $682 million in the third quarter to cover loans that could potentially turn bad in the future. That compares with $757 million in the third quarter of 2014 and $935 million in the second quarter of 2015. The bank lost $963 million to loan defaults, or 0.51% of its overall portfolio, compared to a 0.65% charge-off rate in the third quarter.

Return on equity, a measure of the J.P. Morgan's profitability, was 12% in the third quarter compared with 10% a year earlier. J.P. Morgan faced some questions from analysts and investors earlier this year over whether it might be better for shareholders if the global bank broke itself up into smaller, more manageable units.

The bank continued to cut its workforce last quarter, shedding 1,781 people to 235,678.

J.P. Morgan kicks off the third-quarter earnings season for large U.S. banks. Shares in J.P. Morgan hit an all-time record of $70.61 in July but have fallen 13% since then. For the year, they are down 1.7% compared with a 5.1% decrease in the KBW index of bank stocks over the same period.

--Maureen Farrell contributed to this article.

Write to Emily Glazer at emily.glazer@wsj.com

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(END) Dow Jones Newswires

October 13, 2015 18:17 ET (22:17 GMT)

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